After the Brexit vote, the British pound sterling has been depreciating but large-cap exporters are capitalizing on the weaker currency, lifting currency-hedged United Kingdom exchange traded funds.
Year-to-date, the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) increased 8.9%, iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU) gained 9.5% and WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) advanced 13.5%.
Meanwhile, the iShares MSCI United Kingdom ETF (NYSEArca: EWU), a non-currency-hedged U.K. ETF, fell 1.8% and the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) declined 11.0% so far this year.
[related_stories]The British pound sterling was trading around $1.3144 Tuesday, compared to a pre-Brexit vote high of $1.4877.
The depreciating GBP has helped support large-cap U.K. companies and pushed the benchmark FTSE 100 index to 12-month highs.
“The FTSE 100 has 50 per cent of sales/profits outside of Europe and 70 per cent outside of the UK, weaker GBP should mean higher earnings per share for UK plc,” Jonathan Stubbs of the Citi bank’s equity team told the Financial Times.
Related: Don’t Fight the Charts on the British Pound ETF
Given the weaker sterling but resilient global growth outlook, Citi agrues that U.K. earnings per share growth estimates will be positive by 2017, the first time it has moved into the black in five years.
Since mid-2012, U.K. earnings on a trailing basis have declined about 50% but trailing dividends per share have increased 20%, causing the payout ratio to rise to 90%, the highest in 50 years.
This “is unsustainable… either UK companies will need to cut dividends or earnings will need to improve (soon),” Citi said.
Related: Look to Currency-Hedged U.K. ETFs as BOE Signals Looser Policies
Looking ahead, many expect the Bank of England to enact more accommodative measures to help bolster the economy. In the post-Brexit environment, Martin Weale, one of the bank of England’s long-time hawks, is even beginning to turn dovish on their policy outlook.
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Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF