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By John Wasik
CHICAGO, March 11 (Reuters) - Despite all the evidence tothe contrary, I am bullish on John Bull. Although Britain'seconomy is struggling, it may be poised for a decent long-termrebound, but not for the usual reasons.
The struggles are evidenced by recent news out of Londonthat the British Chambers of Commerce lowered their economicgrowth forecast for 2013 to 0.6 percent from 1 percent. That isbelow the 1.2 percent rate predicted by the Office for BudgetResponsibility, which is considered an official prediction.
I saw this stagnation in action when I visited London andCambridge recently, and noticed a lot of empty restaurants.Service employees told me there was little new work at a timewhen immigrants from ailing European Union countries such asGreece, Italy and Portugal were still trickling in for the fewlow-skilled jobs available. One local business owner told me theeconomic climate in the city is dour.
There is more bad news when you consider that Moody'srecently downgraded Britain's credit rating and that the Bank ofEngland said it was not augmenting its Federal Reserve-likequantitative easing policy for now. The pound has been one ofthe poorest-performing currencies against the dollar this year.And more budget cuts are being contemplated as part of a seriesof austerity measures imposed by Prime Minister David Cameron'sruling coalition.
POTENTIALLY BRIGHTER FUTURE
Although the possibility of a British recession is not offthe table, there are reliable forecasts that have the Britisheconomy in positive territory for this year and into next year.According to independent outlooks compiled by the BritishTreasury last month, GDP growth rates may hover around 1 percentthis year and climb to 1.6 percent in 2014.
Lost in a fog of grim economic news is the fact that the UKmanaged to export a record amount of goods last year, accordingto its Office of National Statistics. This shift of business toemerging economies in Latin America and Asia - and away from themoribund euro zone - will fuel growth in Britain later this yearand beyond.
PriceWaterhouseCoopers thinks Britain's exports to Brazil,Russia, India and China "have the potential to double to around16 percent by 2030" even though the country's economy "remainsrelatively fragile," according to a report the firm issued latelast year.
And some leading British stocks are attractively valued,especially in sectors like financial services, pharmaceuticals,information technology, energy and manufacturing. The best wayto find these companies is through exchange-traded funds suchas:
1. The iShares MSCI United Kingdom Small Cap fund
This fund holds small, no-name companies, which have thebest potential for long-term growth, and was up almost 5 percentyear to date through Feb. 27. The stocks in this portfolio arebargain-priced with an average price-to-earnings ratio of below12 percent.
The U.S. Standard & Poor's 500 stock index's p/eratio is around 17, which is just a few points above itshistorical average of 15.5. A January report from HSBCestimates 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 mostlymid-sized companies such as easyJet Plc and AshteadGroup Plc. About 40 percent of the portfolio is inconsumer cyclical and financial services stocks. Although theydo not get as much attention as their big-cap brethren, mid-capstocks often have greater upside potential.
3. iShares MSCI United Kingdom Index
This fund is most reflective of the UK economy overall andis up less than 1 percent this year. As such, it has a loweraverage p/e ratio - below 11 - and features some of thebrand-name British-based companies such as HSBC Holdings Plc, BP Plc and Vodafone Group Plc.
This fund has nearly 40 percent of its weighting infinancial services and energy, which investors should note ifthey are concerned about balancing. And its inclusion of themining companies Rio Tinto Plc and BHP Billiton Plc position it well for future emerging markets growth. Thefund also offers a strong 3.5 percent yield.
When investing in Britain, keep in mind that you should notbe too anxious to see short-term gains. If your investment doesnot include the rest of Europe, then devote less than 5 percentof your stock allocation to the country.
The UK is part of a long-term recovery scenario that willplay out over years. And its quest to grab even more exportincome from developing nations pits it against tough competitorssuch as the United States, Germany, Japan and Australia.
In the interim, there is bound to be some more economichardship in Britain as it battles through more rounds ofpunishing austerity measures. You have to be patient if youbelieve in the country.
But even if Britain slips into another recession, that wouldcreate even more bargains. Now is the time to reap those valuestocks at good prices.
