England Swings: Weekly International ETF Report
Britain’s economy swung away from its second post-2008 recession during the third quarter. Is it swinging back into recession now?
After escaping recession during the third quarter, the question remains as to where Britain’s economy went during the fourth quarter. Although many commentators anticipate that the U.K will experience another recession – a 
“triple dip” – the nation’s labor market has shown some improvement. Whether an improved employment climate will boost GDP remains to be seen.
On January 8, Britain’s Office for National Statistics released its Economic Review for December. The report analyzed the weakness of the nation’s economy throughout 2012. The third-quarter expansion of GDP by a mere 0.9 percent (despite expectations of 1.0 percent) followed three consecutive quarters of negative GDP. The report emphasized how the economic slowdown throughout Europe reduced demand for British exports and expanded the nation’s trade deficit:
In part the deterioration in trade performance can be put down to a slowdown in world trade, especially in Europe. Since 2008, UK exports to the European Union (EU) have been much weaker than exports to other countries. Excluding oil and volatile items such as aircraft and precious stones, the volume of exports of goods to non-EU countries has risen by around 35 per cent since 2009, compared with growth of only 6 per cent in exports to the EU. In contrast imports to the two areas have risen by similar amounts – by nearly 19 per cent and 17 per cent respectively.
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Over the course of 2012, there has been a slowdown in world trade and this is particularly pronounced in the Euro area where economic growth has been weak. Conversely, emerging economies, particularly Asian countries, have seen a marked growth in imports of traded goods as their economies have grown.
On January 9, Britain’s Office for National Statistics disclosed that the nation’s trade deficit on trade in goods and services was estimated to have been £3.5 billion in November, compared with a deficit of £3.7 billion in October. Although this might appear as an improvement, the trade deficit in September was only £2.5 billion. In fact, the January 8 report pointed out that during the first ten months of 2012, the average monthly trade deficit was £2.9 billion, an increase of almost £1 billion per month over the same period in 2011.
The Office for National Statistics brought a double-dose of bad news on January 11 when it reported that the total volume of construction output in November 2012 was estimated to have been 9.8% lower than in November 2011 and that the nation’s industrial production fell 2.4 percent in November on a year-over-year basis. Economists had been expecting a less-significant, 1.8 percent decline in industrial production. Britain’s manufacturing decreased by 2.1 percent between November of 2011 and November of 2012, despite expectations of a 1.3 percent decline.
Despite the week’s gloomy reports from Britain’s Office for National Statistics, investors remained bullish on Britain. Both the FTSE 100 Stock Index and the iShares MSCI United Kingdom Index ETF (NYSEARCA:EWU) have advanced to levels not seen in an awfully long time. The chart below indicates that on January 11, the FTSE 100 reached 6,121 – its highest level since May of 2008 (Chart courtesy of Stockcharts.com):
The chart below depicts the trading activity in the iShares MSCI United Kingdom Index ETF (NYSEARCA:EWU) during the past 180 days (Chart courtesy of Stockcharts.com):
On January 11, EWU closed at 18.27. We need not look back to 2008 to see EWU close at this level. EWU was at 18.27 in late May of 2011 and its mid-May 2008 high was a whopping 23.56 – compared with mid-May high of the FTSE 100 at 6,304. The Relative Strength Index for the FTSE 100 was indicated on the chart as 71.43, suggesting an overbought market because it broke above 70. On the other hand, the RSI for the EWU ETF was at 65.
The Economic Review for December from the Office for National Statistics reported one bright spot: an improving labor market. Nevertheless, as the report noted, households “have chosen not to spend in line with the growth in incomes”.
Europe ETF Update:
iShares MSCI United Kingdom Index ETF (NYSEARCA:EWU): -0.05%, This ETF is designed to track the performance of the MSCI United Kingdom Index. The fund will at all times invest at least 90% of its assets in the securities of the MSCI United Kingdom Index and in depositary receipts representing securities in that index. The MSCI United Kingdom Index of stocks traded primarily on the London Stock Exchange. Components primarily include consumer staples, energy and financial companies. The fund is non-diversified.
Vanguard MSCI Europe ETF (NYSEARCA:VGK): +0.42%, This ETF is designed to track the performance of the MSCI Europe Index. The MSCI Europe Index tracks Europe stock market performance as reflected by the performance of top companies and sectors in developed Europe including France, Germany, Greece, The United Kingdom, Sweden, Norway, and Italy. Europe Doubles S&P 500 Performance Over the Last Six Months
iShares MSCI Germany Index Fund ETF (NYSEARCA:EWG): +0.72%, This ETF is designed to track the performance of the MSCI Germany Index. The MSCI Germany Index tracks German stock market performance as reflected by the performance of top companies and sectors in Germany including Siemens, Bayer, SAP, and Deutsche Bank. Learn More About iShares ETFs
iShares MSCI France Index ETF (NYSEARCA:EWQ): +0.63%, This ETF is designed to track the performance of the MSCI France Index. The fund normally invests at least 95% of its assets in the securities of the underlying index and in depositary receipts (DRs) representing securities in the MSCI France Index. It invests at least 80% of its assets in the securities of the MSCI France Index or in depositary receipts representing securities in the MSCI France Index, which consists of stocks traded primarily on the Paris Stock Exchange.
Bottom line: Both the iShares MSCI United Kingdom Index ETF (NYSEARCA:EWU) and the FTSE 100 Index have made impressive gains, despite a good deal of disappointing economic data from Britain.
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