subject: Investment Strategists Becoming Less Bearish Toward Uk [print this page] We have noticed a steady increase in the number of investment strategists around the world becoming less bearish towards the United Kingdom and United States. With glimmers of better news starting to emerge from these major economies, maybe they have a point.
With the major economies wallowing in massive debt, budget deficits and crumbling housing markets, emerging markets like China and India along with the commodity economies such as New Zealand and Australia have been the investment darlings of the past year.
However, there are signs that the economies and markets of the major countries are stabilising. At the same time, there is a growing view that the enthusiasm for emerging markets could be a little overdone in the short term. It appears that an increasing number of investors are sending more money back to the blue chip shares, in the blue chip markets.
The UK has always been an important market for many New Zealanders investing in shares. Many of us, of course, have historical linkages there, and many returning Kiwis and recent immigrants from the UK have investments in the UK stock market.
While the UK faces some significant challenges ahead, such as the prospect of higher taxes and big cuts to government spending cuts, there are some positive signs for investors looking to invest in the UK.
The first, often overlooked, feature of the UK market is that it is a very international market. We estimate that the top 10 stocks on the UK market earn 70 percent of their revenues from outside the UK. Most of the leading companies are multinationals that happen to be listed in London but have limited exposure to the UK economy.
The UK market also provides a reasonable dividend stream. UK companies may deliver lower yields than NZ companies, but they pay out a far lower proportion of their profits as dividends, meaning they have more potential for growth as they can reinvest these profits.
In the UK the average payout ratio across the leading stocks is 55 percent. By retaining and reinvesting 45 percent of profits back into their businesses, UK companies have more potential than NZ companies to generate dividend growth over the long term.
There are increasing signs that the UK economy is improving. Problem banks have been recapitalised, the housing market has found a base and households are deleveraging. While the governments debt burden is high, investors are still willing buyers of gilts (UK government bonds) and remain confident that after the election the British government will do what is necessary to rein in the budget deficit and reduce its debt.
The weaker pound has helped Britain regain its competitiveness - an option not open to the problem economies in the Euro.
tThe UK economys core strengths; are its flexible labour markets, openness to trade, capital flows and migration, and its varied economic base, for example, while the financial sector remains a vital part of the economy; the UK is the worlds sixth largest manufacturer. It also has a strong healthcare sector as well as vibrant tourism, fashion, film and technology industries.
The UK faces a general election on May 6. There is a possibility of a hung parliament, which has created a great deal of uncertainty and is possibly, at least partially, responsible for the weakness is UK equity prices and sterling. Markets may improve once the election is out of the way.
The UK currency has been exceptionally hard hit and very problematic for investors those investing. The pound has fallen 18% against the NZD over the past year. Since 2000, when the cross hit 0.27, it has lost an incredible 70% against Kiwi.
The International Monetary Fund estimates that the NZ Dollar is 10-25% overvalued. If the economic, political and fiscal situation improves in the UK, sterling may start to gain against the NZ Dollar.
There are many ways of investing in UK equities. Some people prefer to buy an index fund or a listed investment trust like City of London. Both provide a diversified exposure to the UK market. Others like to put together a portfolio of stocks.
