LONDON – NOVEMBER 22: The logo of the London Stock Exchange is displayed in the foyer of the London … [+]
I am often asked what picks I have for U.S. investors in the U.K. markets, as many look at the valuations and blink in disbelief at how low and out of sync they are with U.S. companies cut from the same cloth.
U.K. stocks are cheap, but it seems that the slumbering FTSE 100 is slowly waking up. Here is a chart of the U.K.’s FTSE 100 and the German DAX index:
The U.K.’s FTSE 100 compared to Germany’s DAX
The recent bunny hop in the U.K. index mirrors sudden breakouts in other assets, and you can see that the German market has experienced a significant acceleration. The penny is dropping that Europe, including the U.K., must roll back bureaucracy and embrace more democracy – both politically and economically – to get back on track. If they don’t, they face a very unpleasant near future, with the U.S. grappling with China and the mad chap in the east ogling their border. Of course, Europe could choose not to get its skates on, but the writing is so clearly on the wall that the trend toward getting off its fat, comfy derriere and stepping up its game is undeniable.
This, I feel, is very bullish – as long as developments don’t spook capital into fleeing for the hills and crashing the whole shooting match in a moment of epiphany.
This is why gold is already so feisty. But wait.
The gold chart seems to mirror Germany’s DAX
Well, that’s kind of interesting. Of course, some will argue that correlation is not causation, but those who do generally aren’t market operators. Betting against correlation is a road to the poorhouse.
So, I would say to U.S. investors: the way to trade the U.K. is as follows:
- Go to your favourite investor site.
- Pull up all the U.K. companies’ fundamentals.
- Compare and contrast the valuations of U.K. versus their U.S. equivalents – for example, price to sales, P/E ratios, and dividends.
- Look for the cheapest comparable companies with a solid legacy of stability.
You can apply the same approach to Germany and France, though the gap between U.S. and German company valuations won’t be so stark. This method allows you to build a nice selection of companies that are practically begging to be taken over.
There is, however, an easier way.
The quickest way to gain some exposure to the U.K. market is through the iShares MSCI UK ETF (EWU):
The iShares MSCI United Kingdom ETF chart runs alongside the FTSE 100
While it’s not exactly the FTSE 100, the iShares MSCI United Kingdom ETF runs closely alongside the FTSE 100 and offers similar exposure.
Diversification is always wise, and with the seismic changes about to shake up Europe and the U.K., adding a bit of Euro seasoning to a spicy U.S. portfolio makes a lot of sense.
