By John Wasik
CHICAGO, March 11 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
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
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
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
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
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.