What the U.K. Can Teach Debt-Riddled Washington

by InvestorPlace Staff | June 22, 2011 8:42 am

Last year, the U.K. took the first painful steps on the path of fiscal austerity that the U.S. has so far avoided.And the iShares MSCI United Kingdom ETF Fund (NYSE: EWU[1]) has outperformed the major American stock market indices. The EWU U.K. ETF is up 20% in the last 12 months, compared to about 16% for the broader U.S. market.

Of course, The iShares United Kingdom ETF fund doesn’t tell the whole story. The 40 billion pound “unavoidable budget” of emergency tax increases, public sector job cuts and government spending cuts in Great Britain was incredibly unpopular with the public regardless of how the British ETF performed.

Some experts argue that Prime Minister David Cameron is trying to do too much too fast. The Conservative government, though, has its fans. Pimco fund manager  Saumil H. Parikh recently argued that the U.K.’s economic policy could be could be a model for the U.S. to follow.  Moody’s Investor Service recently reaffirmed the government’s AAA rating on its sovereign debt with the not surprising warning that it would be in danger if the government slacked off on its austerity policy.

“We think the U.K. is implementing what is probably the best combination of fiscal and monetary policies to address deficit reduction with an eye to structural issues,” he writes. “… they are reducing certain corporate tax rates, increasing incentives for investment, and trying to promote activities that have what we would call high multipliers to economic growth – all so that the future state of the U.K. economy will be, if all goes according to plan, in a much more stable and a much more competitive position.”

The IMF also sees better times for the U.K, with real GDP growth rate of 2.3% in 2012, up from 1.7% in 2011.  That surpasses the 2.1% growth rate expected for Germany and the 1.8% forecasted for France.  Shares of the benchmark FTSE-100 Index, are down 3.5% this year, underperforming both Germany’s  DAX and France’s CAC-40.

Some brightspots in the U.K. index, which has been dragged down by worries about Greece and the uneasiness of the British consumer, include  Aggreko PLC (PINK:ARGKF[2]), a provider of temporary power and temperature control,  Admiral Group PLC, a car insurer, and Rupert Murdoch’s British Sky Broadcasting Group PLC (PINK:BSYBY[3]). They have all advanced by double digits this year.  The overall index is down 3.5% this year and trades at a multiple of 13, lower than the French and German benchmarks, which indicates there are more values to be had for patient investors.

Parikh’s view seems not to be shared by many economists in the U.K., which underscores the risks that foreigners take when they invest there.  In March, the Office of Budgetary Responsibility, argued that the recovery would precede at a weaker pace that the recoveries of the 1980s and 1990s. To be sure, times are tough  in the U.K. though Prime Minister David Cameron has vowed to fight against what he called “the enemies of enterprise.”

Like President Barack Obama,  Cameron has his work cut out for him.

Endnotes:
  1. EWU: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWU
  2. ARGKF: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARGKF
  3. BSYBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BSYBY

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