The iShares MSCI United Kingdom ETF (NYSEArca: EWU), the largest U.K. ETF trading in the U.S., is up 6% year-to-date, but gains for U.K. equities could be challenged as the formal start of the Brexit process looms.
The pound has been the worst performing asset since the U.K.’s decision to leave the E.U. last June, and the majority of analysts who’ve changed their forecasts since the referendum results are now projecting the currency to remain depressed. To its credit, the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is up nearly 2% this year.
The weak pound has been a boon for U.K. stocks since last year’s Brexit vote.
“UK equities have done well. But much of the FTSE 100’s 20% surge since the Brexit vote boils down to a weak pound and rebounding commodity prices flattering the index, given the heavy weight of global banks and miners. For unhedged foreign currency investors, the outcome is less impressive: a gain of less than 1% in USD terms,” said BlackRock in a recent note.
Currency hedged ETFs, including the iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU), WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK), are benefiting from sterling weakness.
Sterling still faces multiple challenges as Great Britain sets out on its Brexit course. British Prime Minister Theresa May is aiming for a swift departure from the European Union (EU) while some market observers around the world are hoping for a more measured approach.
“The outlook for UK assets from here will be driven by slowing domestic conditions, offset in part by the global reflationary backdrop. Political and headline risk will remain high. We see the possibility of a snap election before the next UK general election is due to occur in 2020. Once Article 50 is triggered, running commentary on what Brexit means could stir more volatility, primarily in the pound but also possibly in some export- and import-sensitive equity sectors,” according to BlackRock.
Financial services stocks account for 21% of EWU’s weight while consumer staples and energy names combine for over 31% of the ETF’s roster.
For more information on the GBP, visit our British pound category.