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Four Stocks to Buy Ahead of Britain's Unexpected Economic Turnaround

Economics / UK Economy Jul 21, 2010 - 05:45 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: I have been negative on Britain for a decade - and with good reason. The British economy was over-dependent on financial services, and government spending - at greater than 50% of gross domestic product (GDP) - was out of control.


However, the new government that took office in May has prompted me to reconsider my investment viewpoint. The new coalition has made progress on both of these once-worrisome issues.

And that means the British market is now one that investors should very carefully consider.

Let me explain...

'Encouraging Signs'
When Britain's Conservative (307 of 650 seats) and Liberal Democrat (58 seats) parties announced they were forming a coalition government May 10, it wasn't clear how this new government (the first British coalition since World War II) would actually function. The Liberal Democrats appeared to be closer ideologically to the Labour party than to the Conservatives, the conventional wisdom was that the government would be short-lived and finally ripped apart by disputes.

As an obvious longtime observer of British politics, however, I saw solid potential.

Two months later, the signs are encouraging. The coalition has produced a budget that takes Britain's budget deficit down to 1% of GDP over the next five years, with only a modest rise in Value Added Tax (VAT) on the taxation side.

Admittedly, the government has yet to spell out all the spending cuts that will be necessary to meet this goal - that is usually done in a spending announcement in late fall - but the budget has been well-enough received that there is at least considerable momentum towards the goal.

A New Fix-It Plan
One recent announcement is particularly interesting. It's widely known that Britain has a system of state medicine - the National Health Service (NHS) - that provides universal care. But the cost of that care can include long waiting lines and in some cases life-threatening deficiencies in the quality of care.

The Labour government had tried to solve these problems by simply throwing money at them. But the not-so-surprising result was the growth of an enormous-and-overpaid central bureaucracy - while the problems continued to persist.

Many of Britain's regional health chiefs are nothing more than public sector appointees, with no significant career risk. And their yearly salary is nearly double what the prime minister earns - a salary that's also not inconsequential.

Baseball slugger Babe Ruth, who in a similar position back in 1930 was taken to task for earning more than U.S. President Herbert Hoover, quickly quipped: "Why not, I had a better year than he did." But the regional chiefs cannot make that same claim with regard to the British prime minister; in point of fact, there's really no way of telling whether those regional health chiefs had a good year or not.

The new government, both of whose component parts had campaigned on protecting spending on the National Health Service, in spite of the spending cuts needed elsewhere, has now proposed to abolish all the regional bureaucracies, and to devolve patient care - and spending decisions - onto local doctors.

It remains to be seen how precisely this will work - or whether the bureaucracies will succeed in blocking it - but it has the potential to markedly improve the quality of British healthcare. Indeed, it has the potential to prove a better system than the new U.S. system under the health legislation championed by U.S. President Barack Obama - and for one simple reason: Decisions in the United Kingdom will be much less centralized, but taken at a level as close as possible to the patient.

Certainly, given the maintenance of spending on the NHS, it should produce more and better healthcare for the taxpayer money it absorbs.

The public spending cuts should free up resources for the Britain's battered private sector, while the reforms proposed for the financial sector should reduce its rent-seeking tendencies, thereby also improving resources (if only of top talent) for other sectors.

Profit Plays to Consider Now
That brings us to the British stock market, which - sans the financial-services sector - is today at least a modest "Buy." Some ideas:

•The iShares MSCI United Kingdom Index (NYSE: EWU) is a good broad proxy for the market as a whole, with a yield of 2.7% and a Price/Earnings (P/E) ratio of 12. For a single U.K. holding, it has advantages.
•Ensco PLC (NYSE: ESV) is an oil-drilling-rig operator that seems to agree with my upbeat assessment of Britain's potential - indeed it believes in that potential so strongly that in April it relocated its corporate domicile from Delaware to Britain, and its corporate headquarters from Dallas to London (British taxation on international operations is less draconian than the United States'; also, if they're like me, they prefer the climate in London to the environment in Dallas!). As you'd expect from the relocation, Ensco is a worldwide operator, with only a small part of its operations in the Gulf of Mexico. However, the general weakness in oil-service stocks has driven the historic P/E down to 7.7 and the Price/Book (P/B) ratio down close to 1.0, while the dividend yield is a healthy 3.3%.
•Smith and Nephew PLC (NYSE ADR: SNN) is a maker of medical devices, and its specialties include such disciplines as orthopaedics, endoscopy and wound management. With a P/E of 15 on current earnings and a prospective P/E of 12, the company is not overpriced and it stands to benefit substantially from any sorting out of the National Health Service that takes resources out of bureaucracy and puts them into patient care.
•Rio Tinto PLC (NYSE ADR: RTP) is a global miner and minerals refiner with substantial promise. Indeed, with the battering that natural-resources stocks have taken in the last few months, RTP has been knocked down to a P/E ratio of only 4 times 2009 earnings, 6.3 times prospective 2011 earnings and 50% of book value. That's ridiculous. It's a screaming "Buy."

[Editor's Note: As you reflect upon the content of this special report, keep one fact in mind: Money Morning's Martin Hutchinson has been on a global hot streak.

Here's what we mean. Just a week after Hutchinson recommended Germany, the European keystone reported much stronger-than-expected GDP. He recommended Chile back in December, and three of the stocks he highlighted have posted strong, double-digit returns - and one is up nearly 25%. He again recommended Korea - which analysts were downgrading - only to have the traditionally conservative International Monetary Fund (IMF) come out with an upgraded forecast that projects solid growth for that Asian Tiger for this year and next.

A longtime international merchant banker, Hutchinson has a nose for profits instincts - as evidenced by his unerring ability to paint a picture of what's to come. He's able to show investors the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner.

With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson puts those global-investing instincts to good use. He's managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers.

Take a moment to find out more about "Alpha-Bulldog" stocks and The Permanent Wealth Investor by just clicking here. You'll the time well spent.]

Source :http://moneymorning.com/2010/07/21/britain/

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