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Foreign Investment---European Trader: A Contrarian Bet: Buy British -- Barron's

12 May 2018 10:00 am
By Victor Reklaitis 

The major stock benchmarks -- European, American, and others -- haven't exactly hit it out of the park this year. In fact, they've been whiffing a lot thanks in part to investor fears that it's late in the recovery, with the nine-year-old U.S. expansion ranking as the second longest in U.S. history.

Investors with such worries ought to consider a broad bet on United Kingdom stocks, say Bank of America Merrill Lynch strategists. The U.K.'s FTSE 100 works as a "later-cycle trade, given its heavy weight in commodities and defensives," writes the BofA ML team. They say they're closing out their bet on European health-care stocks and dividend payers and switching into U.K. equities. (For an options play on rising European stocks, see page M9.)

Commodities producers tend to outperform when an expansion gets on in years, and the FTSE has plenty of them. Oil and gas companies such as BP (ticker: BP.UK) make up 16% of the index, while basic-resources plays such as miner BHP Billiton (BLT.UK) account for 8%. As for playing defense, 21% of the equity index's weighting goes to food and beverage companies, telecoms, health care, and utilities -- typically resilient sectors.

The BofA ML strategists' bet on Britain is contrarian, and they like it that way. "We think the current entry point is attractive from a sentiment perspective," write James Barty, Ronan Carr, and Jack Iacovou. U.K. equity funds have seen huge outflows over the past two years, and BofA ML's March survey of fund managers showed allocations to British stocks at an all-time low, the strategists point out. April's edition showed an improvement, and that could indicate attitudes are "turning the corner," they say.

The outflows followed the U.K.'s June 2016 vote in favor of leaving the European Union. The departure, due to take place in March, has led Allianz strategists to caution that the U.K. is "set to endure a significant period of economic uncertainty and weakness." Many strategists, if not most, have issued similar warnings.

But BofA ML emphasizes that the FTSE is one of the only major stock benchmarks offering a dividend yield above 4%. They also stress that a weakened pound should continue to help the index.

The weakened pound has been providing a boost because the index's multinational companies generate about 70% of their revenue in foreign currencies, getting a lift when sales are switched into sterling. The pound recently changed hands at $1.36, down 9% against the dollar from its pre-Brexit-vote level around $1.50. "Further dollar gains, as our FX strategists forecast, should underpin additional earnings momentum and outperformance," BofA ML says.

The FTSE 100 is up 4% over the past 12 months, trailing the 12% gain of the Standard & Poor's 500, but topping the Stoxx Europe 600's drop of 1%. The British blue-chip barometer trades at 14 times forward-year estimated earnings, below the S&P's multiple of 17 and the Stoxx 600's price/earnings ratio of 15.

The most popular U.S.-listed exchange-traded fund for U.K. stocks is the iShares MSCI United Kingdom (EWU). The MSCI U.K. index is "very similar" to the FTSE 100, say BofA ML strategists. Competing ETFs include the First Trust United Kingdom AlphaDEX (FKU) and the iShares Currency Hedged MSCI United Kingdom (HEWU).

"Clearly, we are later cycle, but that does not mean we are at the end of the cycle, and the difference is crucial for investors," BofA ML says. --

Victor Reklaitis is a London-based writer for MarketWatch.
Global Indexes: http://www.barrons.com/public/page/9_0210-djglobalidx.html 

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(END) Dow Jones Newswires

May 12, 2018 06:00 ET (10:00 GMT)

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