United Kingdom stocks and country-specific exchange traded fund investors may be too complacent about the impending volatility ahead as the country braces for its general elections.
The iShares MSCI United Kingdom ETF (NYSEArca: EWU) has dipped 0.1% year-to-date.
In the weeks ahead, BlackRock argues that investors could see greater volatility in the sterling currency and other U.K. assets on the prospects of an unstable minority government and a potential EU membership referendum after May 7, reports Aliya Ram for the Financial Times.
Others are also voicing concern over the possible political risk. For example, the Royal Bank of Scotland argued that “political risks look under-priced,” pointing out that markets can move swiftly, such as what occurred during last year’s Scottish independence referendum. [Scottish Referendum Throws a Curve at U.K. ETFs]
Last year, the sterling dipped to a 10-month low at the end of September after a poll suggested a Scottish independence was likely to pass. The British sterling has already been weakening against the U.S. dollar this year, with the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) has fallen 4.9% so far this year.
If the GBP continues to depreciate, ETF investors may find that currency hedged U.K. ETF options, like the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) and the WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS), could both outperform EWU. Year-to-date, DBUK is up 5.6% and DXPS is 5.0% higher.
Looking a the U.K.’s political landscape, observers believe that the Scottish National party could increase its representation in Westminster and tip the balance of power.
A labor-led government reliant on support from the Scottish National party to take power “would raise the spectre of a disunited kingdom,” BlackRock said. “This could turn the UK into a sort of pre-crisis Spain.”
The money manager cautioned that a labor-led coalition could “threaten the profitability of highly regulated industries such as banking.. and utilities.”
The financial sector makes up a significant portion of the U.K.-related ETFs. EWU includes a 22.9% tilt toward financials and 4.1% in utilities. DBUK has 22.6% in financials and 4.0% in utilities. DXPS holds 18.4% financials and 5.3% utilities.
iShares MSCI United Kingdom ETF
For more information on the U.K., visit our United Kingdom category.
Max Chen contributed to this article.