EWU: Why U.K. Stocks Are Poised For A Comeback

seekingalpha07-08

The recent Labour party victory in the UK promises greater political stability and a focus on economic growth, clean energy, and improved public services, which could positively impact UK stocks.UK ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nEWU: Why U.K. Stocks Are Poised For A Comeback\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-08 19:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4702856-ewu-why-uk-stocks-are-poised-for-a-comeback><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The recent Labour party victory in the UK promises greater political stability and a focus on economic growth, clean energy, and improved public services, which could positively impact UK stocks.UK ...</p>\n\n<a href=\"https://seekingalpha.com/article/4702856-ewu-why-uk-stocks-are-poised-for-a-comeback\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"EWJ","symbol_name":"日本ETF-iShares MSCI","start_time":0,"source_url":"https://seekingalpha.com/article/4702856-ewu-why-uk-stocks-are-poised-for-a-comeback","article_id":"2449772001","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1430153563/image_1430153563.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2449772001","pubTimestamp":1720436400,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"We do not want to discuss the politics of the election too much, so we will try to focus only on the expected impact on the UK economy. Probably the first thing that has changed is that there is now hope for more stability and clarity on government policy, after the UK had four prime ministers in four years, each having somewhat different policies and priorities. After the Labour party won on a landslide, it is likely that they will be in power for the next five years. 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The last ten years have seen UK stocks dramatically underperform the U.S. market. For example, the iShares MSCI United Kingdom ETF (NYSEARCA:EWU) has delivered only about a tenth of the total return that the Vanguard Total Stock Market ETF (VTI) delivered. While there are several factors that generated this drastic underperformance, politics certainly did not help. The uncertainty and economic impact caused by Brexit, as well as the constantly changing Prime Ministers and government policies, helped keep some investors away. Perhaps the best example of mismanagement was Liz Truss's mini-budget debacle. In any case, as hockey legend Wayne Gretzky famously said, “I skate to where the puck is going to be, not where it has been.” With the UK being one of the few developed markets where valuation multiples have not spiked, and prospects of political and economic stability, we believe UK stocks deserve a closer look. Data by YCharts What Changed? We do not want to discuss the politics of the election too much, so we will try to focus only on the expected impact on the UK economy. Probably the first thing that has changed is that there is now hope for more stability and clarity on government policy, after the UK had four prime ministers in four years, each having somewhat different policies and priorities. After the Labour party won on a landslide, it is likely that they will be in power for the next five years. So what were their main promises to UK voters? Labour campaigned with five key pledges:  Kick-start economic growth Make Britain a clean energy superpower Take back our streets Break down barriers to opportunity Build an NHS fit for the future  One important thing to consider is that Sir Keir Starmer moved the Labour party more towards the center, and he appears open to having a collaborative relationship with the private sector. Markets are probably reassured that the new Chancellor of the Exchequer, Rachel Reeves, previously worked at the Bank of England (BoE). Economic Outlook While the new government comes with different priorities and spending plans, the impact will probably be relatively limited given the fiscal situation in the UK. With public sector net debt exceeding the size of the UK's economy, and significant budget deficits, the new government will not have much room to maneuver, and will need the help from the private sector to achieve their objectives. Perhaps one area where the government can have a more immediate impact is with respect to trade and international relations, particularly with the European Union, as it was the Tories who were responsible for Brexit. Data by YCharts It is not just the UK stock market that has underperformed, but its economy has also experienced underwhelming growth over the past decade. Real GDP is clearly stagnating, hence the urgency to re-ignite growth in the country. Data by YCharts Compounding the misery felt by the average UK citizen, inflation spiked even more than it did in the U.S., even if it has now fallen to 2%, which is below the ten-year average. Consumers were particularly hard-hit by energy costs, given that the UK is a net energy importer and was taken by surprise by the disruptions caused by Russia's war in Ukraine, which resulted in billions of pounds transferred to authoritarian petrostates. This is one of the reasons the message of making the UK a clean energy super power resonated with many voters, as many want clean energy but also energy security. Data by YCharts Finally, the weak economy and uncertain environment led to reduced investment by the private sector, and a relatively high unemployment rate. Still, unemployment is still far below where it was ten years ago, and only slightly higher compared to the U.S. Data by YCharts The British Pound We should not forget that when investing in foreign markets, the appreciation or depreciation of the currency can have a major impact in the final returns delivered. A good example is Japan (EWJ), which has seen its market move significantly higher, but given the significant Japanese Yen (FXY) depreciation, the gains are less impressive in dollars. The good news here is that the British Pound appears somewhere between fairly valued, to undervalued. If we use the Big Mac index, the exchange rate appears fairly valued. Using the more advanced OECD Purchasing Power Parity (PPP), one pound should buy roughly $1.5 dollars, implying an undervaluation of approximately 15%. Should the pound recover to the level implied by the PPP, or its ten-year average against the dollar, it could provide a tailwind to returns for U.S. investors. Data by YCharts Winners and Losers While the reduction in uncertainty and the expected stability should be an overall positive for the UK market, there is no question that there will be some sectors that will benefit, and others that stand to lose. Seeking Alpha already shared a summary of which sectors are most likely to benefit from the Labour party's landslide win. We agree that the house-building industry is one of the clearest beneficiaries, as Labour proposes easing regulations to make house construction easier. In our opinion, this is a more sensible approach, as the only way to really solve the housing shortage is by increasing supply. The Tories were proposing subsidized mortgages, tackling the problem from the \"demand\" side. However, we believe this approach would have only benefited existing property owners, as it would only incentivize bidding more for the limited number of existing properties. Interestingly, some of the biggest winners might not be UK companies, but some of the bigger renewable energy developers. If Labour is serious about making Britain a clean energy superpower, they will need the help of renewable energy developers such as Brookfield Renewable (BEP)(BEPC) and Orsted (OTCPK:DNNGY)(OTCPK:DOGEF). Their pledge to triple solar power could also benefit companies like Enphase Energy (ENPH), SolarEdge (SEDG), and SMA Solar (OTCPK:SMTGY)(OTCPK:SMTGF). Labour will work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030. As for the main losers, it appears it will likely be their oil and gas companies, including Shell plc (SHEL)(OTCPK:RYDAF) and BP p.l.c. (BP). While it seems they will allow an orderly phase out of the North Sea oil and gas production, they will be significantly more restrictive with respect to new projects:  [...] ensure a phased and responsible transition in the North Sea that recognizes the proud history of our offshore industry and the brilliance of its workforce, particularly in Scotland and the North East of England, and the ongoing role of oil and gas in our energy mix. We will not issue new licences to explore new fields because they will not take a penny off bills, cannot make us energy secure, and will only accelerate the worsening climate crisis. In addition, we will not grant new coal licences and will ban fracking for good.  EWU Main Holdings For investors wanting exposure to UK stocks, EWU is one of the main ETFs available, with massive assets under management of ~$2.8 billion that results in high liquidity. Still, it is highly concentrated in multinationals that are less sensitive to the UK economy and more dependent on the global economy, and for some of them commodity prices.   iShares A Potential Alternative A potential alternative that we find more attractive is the iShares MSCI United Kingdom Small-Cap ETF (EWUS). While EWUS only has about $42 million in AUM, and therefore significantly less liquidity, we find its holdings significantly more attractive. In it, you can find some very high quality companies that would benefit disproportionately if the UK's economy improves. Companies like the British version of Starbucks (SBUX), Greggs plc (OTCPK:GGGSF)(OTCPK:GGGSY), lab equipment manufacturer Spectris plc (OTCPK:SEPJF)(OTCPK:SEPJY), and real estate portal Rightmove plc (OTCPK:RTMVY)(OTCPK:RTMVF). Valuation While UK stocks appear to be extremely cheap with a P/E ratio of ~14x, at least part of the valuation difference with the U.S. can be explained by the weighting they have to technology stocks. The Vanguard Total Stock Market ETF has 29.9% of its value in the technology sector, for comparison the iShares MSCI United Kingdom ETF (EWU) has only 0.79% of its value in technology, and its highest exposure is to the financial sector with a roughly 17.9% exposure. Still, other countries with a more similar industry distribution are trading at significantly higher average P/E multiples, such as Canada. The iShares MSCI Canada ETF (EWC) has an even larger exposure to the financial industry compared to EWU, at ~35%, but still commands a P/E multiple that is about 26% higher. It is therefore fairer to compare the UK market against its own historical average, which results in the current P/E ratio being very close to the ten-year average, and therefore considered a reasonable valuation, while markets like the U.S. and Canada are trading with expensive multiples even when compared to their own historical averages.   World PE Ratio Risks While there are reasons to be optimistic about UK stocks beyond recent election results, it is important to remember that this does not immediately change the economic reality for the country. It continues to have an enormous public debt burden, stagnant economic growth, rising unemployment, significant budget deficits, and is highly dependent on energy imports. Some of its biggest corporations are commodity producers, and highly sensitive to economic conditions that affect prices for oil, gas, and other commodities. The value of the British pound can also affect the net results for foreign investors. Finally, while the current leadership of the Labour party has moved more towards the center of the political spectrum, past leaders were in favor of nationalizing some key sectors. Conclusion It is widely acknowledged that UK stocks have been undervalued compared to other developed markets for some time. Much of the underperformance started with the Brexit decision, which created significant economic uncertainty. The revolving door of Tory Prime Ministers, and economic missteps like the Liz Truss mini-budget disaster, also scared investors away. Now that there is potential for five years of political and economic stability, UK stocks are poised for a long-awaited re-rating, even if risks remain very significant.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2449772001"}