Last summer, I began accumulating shares of iShares MSCI United Kingdom (EWU). My primary reasons included: (1) an attractive valuation for the developed-market asset, (2) the resilience of the British consumer and (3) the region’s freedom to make decisions independent of the European monetary zone. (See, How Much -- If Any -- EU Equity Should You Hold?.)
With a bevy of well-respected corporations like Vodaphone (VOD), Diageo (DEO), GlaxoSmithKline (GSK), iShares MSCI United Kingdom (EWU) continues to impress as a venerable foreign asset. Granted, it may appear to be more volatile than domestic assets due in large part to currency fluctuations. Yet the risk-reward of owning this exchange vehicle has earned it a spot in most of my client portfolios.
Five Reasons You Should Embrace The U.K.
1. Manageable Public Debt. Most of the stock market’s recent rebound over the last 5 days may be attributable to a belief that Janet Yellen would do “whatever it takes” to stimulate the U.S. economy as necessary; Ms. Yellen even emphasized that tapering of bond purchases are not on a pre-set course. Yet many writers failed to take note that, for the first time in nearly three years, the U.S. House of Representatives voted to raise the debt ceiling without any conditions. In so doing, the country’s 106% public debt-to-GDP is a can that may be kicked further down the road for only so long.
In contrast, the International Monetary Fund (IMF) rates the United Kingdom as having one of the more favorable public debt-to-GDP ratios of any developed country or region. While 88% may not exactly be an unencumbered statistic, it is far more manageable than the bulk of eurozone countries in the same neck of the woods.
2. The Return of “Goldilocks.” Collectively, developing countries still boast better economic growth rates and better debt ratios than most of the developed world, including the U.K. Yet the contribution of global growth by emergers is still declining. Meanwhile, the eurozone is just barely working its way out of a recession and the United States has been averaging closer to a “new normal” of 2%-2.5% GDP.
In contrast, the United Kingdom may have the best GDP/modest inflation of any developed region or country. The Bank of England (BOE) recently forecasted annualized 2014 GDP of 3.4%, a marvelous upward revision from 3 months earlier. And with inflation expected to average under 2% for the next 3 years, there are plenty of reasons to be optimistic about U.K. prospects.
3. Impressive Technical Uptrend. Even the mighty Dow briefly breached a 200-day trendline on the downside last week. The U.S. has roared back in impressive fashion, of course. Nevertheless, it’d be wise to take note of the steady stream of “higher highs” for EWU since July of 2013 as well as its ability to trade above the widely regarded 200-day moving average.
4. Yellen and Carney. In the same manner that Janet Yellen is being scrutinized as the new head of the Federal Reserve, the relatively new Bank of England (BOE) Governor, Mark Carney, has had to face a host of uncomfortable questions about everything from forward guidance to asset bubbles. Yet he is receiving the same upbeat benefit of the doubt by the financial markets as Ms. Yellen. Similarly, the BOE is on the same page as the U.S. Fed, ready to step into support the domestic economy should it falter. Carney’s concentration on downside risks to the U.K suggest that investors may be able to count upon central bank stimulus — the same stimulus that has been the spark plug behind the bulk of U.S. bullishness.
5. Relative Value. On a price-to-earnings basis, the iShares S&P 500 Fund (IVV) trades at a 15% premium to the iShares MSCI United Kingdom Fund (EWU). The twelve-month dividend yield for IVV is roughly 1.9% whereas the annual yield for EWU is approximately 2.5%. By no means should investors abandon U.S. equities based on these types of comparisons. On the other hand, if you are light on foreign holdings and if you have cash to put to work, EWU should probably be in your cross-hairs.