Time to Bet on the British ETF?
Europe has rebounded quite well and is now performing remarkably on rising consumer confidence, declining unemployment rates, rising exports, less concerns on debt levels as well as recovery in manufacturing and service sectors.
While this growth is broad based, a few nations have played a major role in pulling up the continent from depression and the U.K. was among the frontrunners (read: Ride Europe Higher with This Top Ranked ETF).
The fund dedicated to the U.K. economy – iShares MSCI United Kingdom ETF (EWU) – witnessed a surge in inflows lately. Let’s dig a little deeper into what’s behind the fund’s success in accumulating investors’ money and interest.
Bullish UK Economic Outlook
The U.K. economy is relatively sound, especially when compared to its neighbors in the region. The nation revisited the growth path in the beginning of 2013 and continues registering higher growth rate with each quarter. The nation’s service sector data indicates over 1% of GDP growth in the final quarter of the year outpacing the third quarter’s growth rate of 0.8%.
A falling unemployment rate, solid retail sales, smooth inflation track and easing pressure on interest rate policy have perked up overall economic growth. In December 2013, the U.K. inflation rate slowed down to 2% from 2.1% in the prior month and met Bank of England's objective level. The nation’s key interest rate remains unchanged.
Notable Upgrade by IMF
If these were not enough, the International Monetary Fund (IMF) recently boosted its growth outlook for the U.K. The organization now anticipates the U.K. to score a 2.4% growth rate this year, 50 bps up from its prior projection of 1.9%. For 2015, the organization expects growth of 2.2% (read: UK ETFs in Focus on Positive Outlook).
The improved outlook comes on easier credit conditions and increased confidence in the U.K and recovering global economic conditions. Also, the country has manageable public debt (88.70% of GDP in 2012).
The business group CBI and the U.K.’s office of budget responsibility also echoed the same growth rate as estimated by IMF while the British Chamber of Commerce (BCC) anticipates a slightly better rate of 2.7% for 2014 and 2.4% (downgraded from 2.5% predicted earlier) for 2015.
Market Impact
Given this slow-but-steady scenario, the U.K. has emerged as a preferred location for investment as of late hauling in about $540 million of assets so far in 2014, compared to losses for many U.S.-focused products in the same time frame.
EWU in Focus
Launched in March 1996, EWU is the largest and the most popular British ETF having AUM of about $4.04 billion and trading an average daily volume of 2,300,000 shares. The ETF charges 49 basis points in fees and expenses to investors per year.
It tracks the MSCI United Kingdom Index. The capitalization weighted index holds some of the biggest names in the U.K. equity markets such as HSBC Holdings plc (7.08%), Vodafone Group plc (6.51%), and BP plc (5.19%).
The ETF added about 20% in 2013. EWU holds 106 securities presently and allocates around 42.44% of its total assets in the top 10 holdings thus carrying a certain concentration risk. The fund currently carries a Zacks ETF Rank #1 (Strong Buy) (read: all the Top Ranked ETFs).
Bottom Line
Though the recent upgrade by IMF spread enthusiasm among investors, this can be a short-lived optimism. Most of the market researchers apprehend that the growth rate will slow down in the next year.
Excessive dependence on the spending patterns of debt-ridden households will be responsible for the GDP slowdown. Investors should note that as per BCC, household consumption accounts for two-thirds of the U.K. GDP. Consumers with feeble real earnings might not be able to uphold the economy for longer.
Business investment remains far from being stable. 2013 was a downer on this ground. Though BCC predicts that the U.K. will snap up a 5.7% expansion in business investment in 2014 and 5.8% in the year next, the level will still lag its 2008 height by a wide margin (read: Can UK ETFs Continue to Rise?).
Thus, though accelerated economic growth in the U.K. is good news and indicates a brighter future, the country has a long way to go before regaining its pre-crisis fame. Still, you can certainly argue that the country is on the right track, and that EWU is worth a closer look in today’s market environment.
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