Can Bank Of England Turn U.K. Equities Into Leaders Again?

Includes: EWU, IVV
by: Michael A. Gayed, CFA

"Everything is temporary. Everything is bound to end." - Keren Ann

With the Bank of England announcing additional Quantitative Easing last week and the potential for further money printing and large-scale asset purchases, I thought it might be appropriate to see if the added stimulus designed to soften recessionary pressures would be enough to send U.K. stocks back into outperformance territory relative to the U.S. Take a look below at the price ratio of the iShares United Kingdom ETF (NYSEARCA:EWU) relative to the S&P 500 (NYSEARCA:IVV). As a reminder, a rising price ratio means the numerator/EWU is outperforming (up more/down less) the denominator/IVV.

(Click to enlarge)

First, notice that the ratio topped out in November 2009 and has had some volatile swings since then, with the only clear and powerful uptrends occurring in the months following May 2009, and May 2010. The downtrend in underperformance has been extraordinarily choppy, and the ratio appears to have gotten close to its historical ratio bottom over the past three years. I find it interesting timing that the bottom appears to be coinciding with when BoE QE rumors started hitting.

While entirely possible that the trend resumes on the upside with QE as the excuse, any potential outperformance may be relatively short-lived, particularly if the U.S. Fed initiates its own form of Quantitative Easing 3 in the near future. I suspect in the race to print and ease the equity market which outperforms may be the one whose central bank simply acts more aggressively to counter deflation expectations. For now, the Fed appears to be winning out on that front.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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