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Sympathy for the U.K. Stock Benchmark

Stocks in this article: HBC BCS RBS RTP BBL AAUK

Sentiment in the stock market is lousy after a month-long crash.

Despite what felt like never-ending selling, many markets actually had a solid bounce last week. The news isn't necessarily better, but they rose nonetheless.

Based on how bear markets work (including the current one), it is possible that a rally could last for a couple months. Maybe last week was the start of one. Or maybe not. But in looking at what to buy into, it makes sense to consider things that were hit hardest on the way down.

One area with many reasons to jump is the U.K., which can be accessed with the iShares MSCI United Kingdom Index Fund (EWU). At its worst, it had fallen 60% from its peak, compared with 45% for the S&P 500 in the U.S.

The story on the ground in the U.K. seems bleak. The economy is contracting, inflation is on the high side, the housing market may be worse than in the U.S., the banks may be worse off than in the U.S., and the U.K. bailout of its own banks is more stringent than the U.S. bailout on considerations such as dividends.

Despite all of these things, I believe there is visibility for a meaningful bounce for several reasons. In thinking about a bounce being most pronounced in the areas that were hardest hit, EWU has been hurt by its heavy weighting to mining companies and financial stocks. Also, the British pound has dropped almost 20% in the past three months.

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