by Jrg Billina, Euro on Sunday
The celebrations for Queen Elizabeth II’s 70th jubilee are over and the UK has returned to everyday life. Despite the monarch’s request to look to the future with optimism, not all citizens and companies want to succeed. Even Prime Minister Boris Johnson, who has just survived a vote of no confidence from his Conservative Party, cannot be satisfied with the prospects for his country.
At nine percent, Great Britain has the highest inflation rate among the G-7 countries. The rise in food, petrol and heating prices is not going away anytime soon. The International Monetary Fund (IMF) is forecasting an interim increase to over 13 percent over the course of this year. Inflation rates far above the average for other countries are also expected for the coming year.
In addition, Great Britain will achieve the weakest growth within the group of the seven most important industrial nations. In the first quarter, gross domestic product grew by just 0.8 percent. A minus of 0.25 percent is expected for the year as a whole, for 2023 an increase of just 1.2 percent is possible. The monetary authorities in Washington warn that the danger of stagflation is real.
The persistently high rate of inflation is not only due to the rise in energy and food prices. The tight labor market – there are currently more vacancies than unemployed – has set a wage-price spiral in motion. Added to this is a corporate policy that is more focused on efficiency and just-in-time than in other countries. According to the IMF, Great Britain suffers from interrupted supply chains much more than other countries.
Import exceeds export
The consequences of Brexit are also increasingly affecting the economy. In the first quarter, the country imported far more than it exported. Exports to EU countries have become significantly more expensive as a result of higher duties. The weak British pound exacerbates the inflation problem. Businesses and citizens have to pay more for imports.
The British central bank is now faced with a dilemma that is difficult to resolve: interest rate hikes can slow down inflation dynamics and also strengthen the pound again. But the more restrictive the monetary policy fails, the more Fed Governor Andrew Bailey risks plunging the economy into recession. So far, the Bank of England has raised interest rates four times in a row by 25 basis points each time to currently one percent. The market is pricing in five more hikes by spring next year.
Continued upside potential
Despite the unfavorable framework conditions, the London stock market is surprisingly resilient. While the leading US index S & P 500 and the DAX have lost significantly, the FTSE 100 still shows a plus of one percent. Analysts from UBS continue to see upside potential: by the end of the year, they believe the leading British index will rise by six percent. There is a reason for the resilience: energy companies are well represented in the index. There are also banks that benefit from interest rate increases. Healthcare and consumer staples companies, which investors view as defensive, are also positioned on the London stock exchange.
Investors who want to participate in the performance of British equities can do so with the iShares MSCI UK ETF. The Exchange Traded Fund comprises a total of 81 stocks, which have an average price-earnings ratio of just 13.6 for the current year.
Non-cyclical consumer goods such as Unilever or British American Tobacco are weighted at 19 percent. The tobacco company’s stock is up 25 percent since the beginning of the year. Financial stocks like HSBC account for around 16 percent, and the share has gained nine percent since January of this year. Health values also went well. Astrazeneca shares are up 17 percent.
The main winners are BP and Shell. Shares in the energy giants are up 20 and 26 percent year-to-date as oil and gas prices soar as a result of Russia’s war with Ukraine. The two companies should continue to make a positive contribution to the performance of the iShares MSCI UK ETF – despite the recent special tax on the high profits imposed by the British Treasury Secretary Rishi Sunak. However, analysts consider the effects of the “windfall tax” to be manageable and continue to rate the shares as “outperform”.
Good branch mix: 81 stocks are listed in the iShares MSCI UK ETF. Banks, consumer staples, healthcare stocks and oil and gas companies are heavily weighted. In three years, the Exchange Traded Fund has gained 23 percent.
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Image sources: Samot / Shutterstock.com, Peter Nadolski / Shutterstock.com
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