The United Kingdom Is Ripe For Stock Pickers

By Aaron Levitt | December 06, 2013 AAA

With Europe now beginning to grind its way out of its recessionary funk, stocks on the continent have become a hot-spot of investor activity. Broad market measures like the Vanguard FTSE Europe ETF (NYSE:VGK) have surged to new 52-week highs over the last few months. Overall, Europe as a whole remains an attractive place to put money to work in today’s market environment.

However, some of nations within the region are a bit more attractive than others. In this instance we’re talking about the United Kingdom.

After dodging a triple-dip recession, equities in the U.K. are set to surge and represent one of the best “values” for investors on the continent. Adding a dose of British stocks could be one of the best bets for the New Year.

London Calling

While its growth isn’t as high as some emerging markets, GDP growth in the U.K. is moving at its fastest pace in nearly three years. The U.K. managed to record 0.7% in GDP expansion in the second quarter of this year and followed that with 0.8% in the third. On a year-over-year basis, the third quarters GDP was 1.5% higher. Overall, its economy registered an annualized GDP growth rate of 3.2% in the third quarter. That’s pretty impressive considering how bad things were in the nation during the economic crisis.

And things are still getting better for the nation.

Driven by gains across all sectors, unemployment in the U.K. has fallen to its lowest level in four years. As the Eurozone- its major trading partner- has managed to get its act together, U.K.-based firms have been seeing huge orders for their products. Manufacturing data for the country has expanded- again at post-recession highs. That’s driving jobs and consumer spending in the nation. All of which is helping pull the U.K. out of its funk.

Given the prospects for better times ahead, the Bank of England has upped its GDP forecasts. The central bank now predicts that the U.K. economy will expand at 2.8% in 2014. That figure represents one of the strongest estimations of growth in the all of Europe.

Despite having the most to gain in the year ahead, British equities are still trading for cheap metrics when compared to the rest of Europe. According to Bloomberg, U.K. equities can be had for a P/E of just 14. That’s cheaper the pan-Europe’s P/E of 15 as well as U.S. market’s represented by the SPDR S&P 500 (NYSE:SPY) at 16. Even more impressive is the U.K.’s CAPE ratio, which is nearly 5 full basis points less than U.S. Adding in the fact the U.K. is home to some of the largest multinationals and yields a juicy 3.4% and you have a recipe for value.

A Fish and Chips Portfolio

With the U.K. being one of the brightest spots in Europe, investors may want to overweight the nation. Luckily, as one of the largest developed markets, investors do have a lot of choice when it comes to adding the United Kingdom to a portfolio. The easiest and broadest way is through the iShares MSCI United Kingdom Index (NYSE:EWU).

The fund follows 107 of the largest companies within the nation. These include a who’s who of multinational giants such as mining firm, BHP Billiton (NYSE:BHP), cigarette producer British American Tobacco (NYSE:BTI) and spirit-maker Diageo (NYSE:DEO). And at 2.72%, the fund yields more than the S&P 500. Another broad choice could be the new WisdomTree United Kingdom Hedged Equity (DXPS) –which uses hedging to take the nation’s currency out of the equation.

With the U.K. being a main ally of the U.S., many of its shares trade on the NYSE. That includes the nation’s top pharmaceutical firms. Getting a major boost from Obamacare as well as emerging market demand for new drugs and therapies, both GlaxoSmithKline (NYSE:GSK) and AstraZeneca PLC (NYSE: AZN) offer strong global growth profiles and dividends. The shares yield 4.7% and 7.3%, respectively.

Like its healthcare industry, the U.K’s energy sector continues to churn out big results. According to research firm Capital Economics, energy firms in the U.K. have delivered earnings growth of 15% a year over the last decade. That’s helped boost earnings and dividends at energy giants like BP (NYSE:BP) and British Gas (OTCBB:BRGYY). With long-term energy demand still in place, these firms should be able to continue pleasing investors into the future.

The Bottom Line

With the situation in Europe finally moving ahead, investors may want to focus on the United Kingdom. Stocks within the nation remain a huge value, despite its growth prospects. For investors, adding a dose of the U.K.’s multinationals or its small caps via the iShares MSCI United Kingdom Small Cap (NASDAQ: EWUS) could be in order.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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