As the U.K. celebrated the arrival in July of a new member to the Royal Family – third in line to the British throne – other encouraging news gradually began to flow across the spectrum. The U.K. economy particularly came up with some positive data since July to show signs of a holistic long-term sustainable growth. The encouraging economic numbers appear to be perfect icing on the cake for a country that is continuously ravaged by the European sovereign debt crisis.
Meanwhile, as global equity markets are continuing to move north in the zero-taper landscape, the U.K. economy seems to be well poised to grow at a moderate pace in the coming quarters as well. Amid such positive developments, it might be a good idea to cherry-pick some fundamentally strong U.K. stocks. However, before we zoom in on a handful of priceless stocks, let us rewind the various turn of events over the past few months.
The Positive Feelers
The U.K. services sector, which account for more than 75% of the country’s GDP, edged up 0.2% in July from the previous month and 1.8% year over year. Second quarter labor productivity (in terms of output per hour) rose 0.5% across the economy for the first time in two years.
Consumer spending was up 0.3% in the second quarter on a sequential basis and up 1.8% year over year. This implied that the country's recovery was slowly yet steadily moving onto firmer footing, reducing the need for more hiring and delaying a rise in interest rates to encourage more consumer spending.
The August Markit/CIPS purchasing managers' index (PMI) for the construction sector came in at 59.1 – the highest tally since Sep 2007, giving further indication that the U.K. economy has improved steadfastly. This complemented the healthy manufacturing PMI figures of 57.2 for the month – the highest in the last two-and-a-half-year period.
The spurt in the manufacturing sector was driven by the fastest rise in both new orders and output since 1994, mostly buoyed by a strong domestic demand. In addition, export orders hit its highest level in more than two years with an impressive 3.6% growth in the second quarter.
The overall U.K. economy expanded 0.7% in the second quarter, well exceeding the economic forecasts. This put U.K.’s growth rate at par with that of Germany, which is considered to be the powerhouse of the Eurozone.
Consumer-sentiment index, as measured by London-based market research agency GfK NOP Ltd., increased from a negative 13 in August to negative 10 in September – the highest tally since Nov 2007. The index has consecutively climbed for five straight months – the longest stretch of gains since Jan 1993, signifying the optimism of consumers about the performance of the economy in the next 12 months.
This has further led the housing market to step-up the ante, which has steadily observed a strong demand from cash-rich foreign buyers. Gross mortgage lending remained relatively stable at an estimated £16.6 billion ($25.7 billion) in August compared with £16.7 billion ($25.3 billion) in July, implying a healthy and broad-based housing market recovery.
As consumer sentiment rises and confidence returns, more and more sellers enter the market and domestic consumption increases. This is likely to improve public finances as tax revenues from companies, sales and employment swell government coffers. On the other hand, steady employment levels will also reduce the burden on government exchequer with fewer expenses for welfare schemes such as unemployment benefits.
A positive market sentiment has further benefited sectors like housing and automobile. According to data from the Society of Motor Manufacturers and Traders, over 162,000 new cars were registered in Jul 2013 – representing a year-over-year rise of 12.7%.
This is the 17th consecutive monthly increase in the U.K. automobile sector, bringing the tally for the first seven months of the year to more than 1.3 million – up 10% year over year. This is encouraging news for automobile majors like General Motors Co. (GM - Free Report) , Ford Motor Co. (F - Free Report) and Honda Motor Co. (HMC - Free Report) .
Data from the Office for National Statistics revealed that retail sales increased 0.9% in the second quarter as retail sales volume was up 2.2% year over year in June. This followed a 0.5% increase in retail sales in the first quarter of 2013, further signifying an upturn in the economy.
3 Must-Have U.K. Stocks
Amid such encouraging data, there are certain U.K. stocks with attractive valuation metrics backed by a solid Zacks Rank #2 (Buy). Let’s take a closer look at these companies that appear to be well positioned to outperform in the short-term.
British American Tobacco plc (BTI - Free Report) : Headquartered in London, British American Tobacco manufactures, distributes and sells tobacco and nicotine products like cigarettes, cigars, smokeless snus, roll-your-own, and pipe tobacco products. The company offers its products under well-known global brands such as the Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Vogue, Viceroy, Kool, Peter Stuyvesant, John Player, State Express 555, Benson & Hedges, Captain Black, and Dunhill. The stock is trading at a forward P/E of 15.14x and has a long-term earnings expectation of 9.19%.
Diageo plc (DEO - Free Report) : London-based Diageo plc trades at a forward P/E of 18.22x and has a long-term earnings expectation of 9.61%. The company produces, distills, brews, packages and distributes spirits, beer, wine, and ready-to-drink beverages across the globe. Some of its reputed products include Johnnie Walker Scotch whisky, Crown Royal Canadian whisky, J&B Scotch whisky, Buchanan's Scotch whisky, Windsor Premier Scotch whisky, Smirnoff vodka, Captain Morgan rum, Tanqueray gin and Guinness stout.
Prudential plc (PUK - Free Report) : Headquartered in London, Prudential offers retail financial products like life insurance, health and protection products, mutual funds, property and casualty insurance, group insurance, institutional fund management and asset management services to individuals and businesses. The stock is currently trading at a forward P/E of 14.58x and has a long-term earnings expectation of 9.00%.
Such strong fundamentals signify that this is perhaps the most opportune time to own these high-potential stocks that pledge a healthy ROI, as experts believe that the market might be vulnerable to a correction once the next election knocks the door.