COLUMN-Why it is worth investing in Britain now

Mon Mar 11, 2013 2:03pm EDT

By John Wasik

CHICAGO, March 11 (Reuters) - Despite all the evidence to the contrary, I am bullish on John Bull. Although Britain's economy is struggling, it may be poised for a decent long-term rebound, but not for the usual reasons.

The struggles are evidenced by recent news out of London that the British Chambers of Commerce lowered their economic growth forecast for 2013 to 0.6 percent from 1 percent. That is below the 1.2 percent rate predicted by the Office for Budget Responsibility, which is considered an official prediction.

I saw this stagnation in action when I visited London and Cambridge recently, and noticed a lot of empty restaurants. Service employees told me there was little new work at a time when immigrants from ailing European Union countries such as Greece, Italy and Portugal were still trickling in for the few low-skilled jobs available. One local business owner told me the economic climate in the city is dour.

There is more bad news when you consider that Moody's recently downgraded Britain's credit rating and that the Bank of England said it was not augmenting its Federal Reserve-like quantitative easing policy for now. The pound has been one of the poorest-performing currencies against the dollar this year. And more budget cuts are being contemplated as part of a series of austerity measures imposed by Prime Minister David Cameron's ruling coalition.

POTENTIALLY BRIGHTER FUTURE

Although the possibility of a British recession is not off the table, there are reliable forecasts that have the British economy in positive territory for this year and into next year. According to independent outlooks compiled by the British Treasury last month, GDP growth rates may hover around 1 percent this year and climb to 1.6 percent in 2014.

Lost in a fog of grim economic news is the fact that the UK managed to export a record amount of goods last year, according to its Office of National Statistics. This shift of business to emerging economies in Latin America and Asia - and away from the moribund euro zone - will fuel growth in Britain later this year and beyond.

PriceWaterhouseCoopers thinks Britain's exports to Brazil, Russia, India and China "have the potential to double to around 16 percent by 2030" even though the country's economy "remains relatively fragile," according to a report the firm issued late last year.

And some leading British stocks are attractively valued, especially in sectors like financial services, pharmaceuticals, information technology, energy and manufacturing. The best way to find these companies is through exchange-traded funds such as:

1. The iShares MSCI United Kingdom Small Cap fund

This fund holds small, no-name companies, which have the best potential for long-term growth, and was up almost 5 percent year to date through Feb. 27. The stocks in this portfolio are bargain-priced with an average price-to-earnings ratio of below 12 percent.

The U.S. Standard & Poor's 500 stock index's p/e ratio is around 17, which is just a few points above its historical average of 15.5. A January report from HSBC estimates that European stocks are still 20 percent undervalued, so there are quite a few bargains among British shares.

2. First Trust UK AlphaDEX

Up just 1 percent year to date, the fund focuses on mostly mid-sized companies such as easyJet Plc and Ashtead Group Plc. About 40 percent of the portfolio is in consumer cyclical and financial services stocks. Although they do not get as much attention as their big-cap brethren, mid-cap stocks often have greater upside potential.

3. iShares MSCI United Kingdom Index

This fund is most reflective of the UK economy overall and is up less than 1 percent this year. As such, it has a lower average p/e ratio - below 11 - and features some of the brand-name British-based companies such as HSBC Holdings Plc , BP Plc and Vodafone Group Plc.

This fund has nearly 40 percent of its weighting in financial services and energy, which investors should note if they are concerned about balancing. And its inclusion of the mining companies Rio Tinto Plc and BHP Billiton Plc position it well for future emerging markets growth. The fund also offers a strong 3.5 percent yield.

When investing in Britain, keep in mind that you should not be too anxious to see short-term gains. If your investment does not include the rest of Europe, then devote less than 5 percent of your stock allocation to the country.

The UK is part of a long-term recovery scenario that will play out over years. And its quest to grab even more export income from developing nations pits it against tough competitors such as the United States, Germany, Japan and Australia.

In the interim, there is bound to be some more economic hardship in Britain as it battles through more rounds of punishing austerity measures. You have to be patient if you believe in the country.

But even if Britain slips into another recession, that would create even more bargains. Now is the time to reap those value stocks at good prices.