In early 2016, investors had ample reason to avoid Brazilian stocks. Corruption scandals, an economic recession and rampant inflation took a major toll on the nation’s Bovespa stock market index.
Despite such headwinds, the Bovespa has surged more than 150 percent since that early 2016 nadir, making Brazil the most rewarding investment environment in the world during that stretch.
Might a similar contrarian play be at hand for the U.K. and its laundry list of problems? Parliament is deadlocked about how and when to leave the European Union. Large volumes of financial assets are flowing to the Continent. The nation’s currency is slumping. Capital spending decisions are being delayed. Labor shortages are emerging as migrant populations flee a xenophobic environment.
Against this untidy backdrop, the iShares MSCI United Kingdom ETF (EWU), the largest in the category with nearly $2 billion in assets, has failed to generate a positive return over the past five years at a time when the S&P 500 Index has risen almost 50 percent.
Morgan Stanley’s Krupa Patel saw the nation’s rising pile of headaches and looked on the bright side—in late-November he shifted his investment weighting on the U.K. to “overweight.”
“The key reason is that the U.K. is very cheap and unloved,” he wrote in a note to clients. How cheap? The average holding in the iShares U.K. ETF trades at 12.3 times forward earnings and carries a 4.65 percent dividend yield, according to Morningstar. That compares to the S&P 500’s earnings multiple of 16.1 and its 2.02 percent dividend yield.
Gene Podkaminer, head of multi-asset research strategies for Franklin Templeton Multi-Asset Solutions, isn’t quite as bullish as Patel. Nonetheless, he suggests that investors not view this major economy and market as irreparably broken.
“Brexit is certainly top of mind for many market participants in the region; however, all is not doom and gloom when examining the UK economy,” he commented via email, citing “corporate profits are also at healthy levels with steady revenue growth.”
Still, Podkaminer notes the Brexit process could negatively impact many facets of the economy, including the potential further slowing of GDP growth and cumbersome trade arrangements with the remainder of the EU. And one sector in particular remains vulnerable.
“The UK has long held a special role in the global finance ecosystem, and many Brexit scenarios potentially dislodge it from that role,” he said.