Is it time to buy the United Kingdom ETF (EWU)?
There are at least four arguments in favor.
First, the market is down 15% year-to-date and the FTSE All share index is cheap relative to history on an earnings basis. Second, dividend yields are close to gilt yields for the first time since equities last bottomed in early 2003. Third, in prior downturns the market recovered soon after interest rates started to fall. And fourth, the UK market and EWU has a 25% weighting to the financial sector which is thought by many to be largely out of the woods.
But the Lex column at the Financial Times demolishes these arguments with vim and vigor.
First, it questions comparing current aggregate earnings to long-run historical data in the UK and the assumption that the mid-teen price/earnings multiples of the last two decades are normal – and today’s 10 times is not. Then it makes light of comparing company dividends (which rise with inflation but are risky) to a government-bond coupon (which is fixed but risk-free) as well as pointing out that this indicator has a poor record in predicting the direction of UK equities.
Lastly, it admits that in the 1980s and 1990s, the turn in the market occurred about a month before the first cut in rates. But in both instances earnings growth was accelerating. Today, consensus estimates are rapidly heading down for this year and next.
EWU is down today 3% at midday.