Contentious Brexit negotiations are weighing on the iShares MSCI United Kingdom ETF (NYSEArca: EWU), sending the largest US-listed exchange traded fund dedicated to U.K. stocks lower by nearly 7% in the fourth quarter.
Investors have been pulling money out of the U.K.-related ETF ahead of the scheduled March date when Britain will exit the European Union. Domestic political battles over the terms of the exit have intensified, with the resignation of two British cabinet members whom favor a decisive break with the E.U. The talks have worsened with U.K. Prime Minister Theresa May seeing cabinet ministers depart while receiving at least one “no confidence” letter from a member of parliament.
There are calls for May to resign and the chances of a second Brexit referendum are on the rise, prompting increased volatility for U.K. assets.
“The heightened volatility was expressed in the trading action in both the British currency and its stock market,” according to Schaeffer’s Investment Research. “Thursday marked the pound’s worst session in two years, while the FTSE 100 tagged a three-week low on Friday. Meanwhile, a popular exchange-traded fund (ETF) that tracks British stocks — the iShares MSCI United Kingdom ETF (EWU) — still has plenty of room to retreat before revisiting its 2016-era Brexit panic lows.”
Closing In On A Bear Market
EWU was already slumping prior to the most recent Brexit drama, which served to further weaken the pound and the benchmark U.K. ETF.
“EWU was already sliding lower on the charts ahead of last week’s fresh round of Brexit drama, having broken below support around $34.20 in early August,” according to Schaeffer’s. “And prior to that, the ETF had been trundling lower under the weight of a trio of daily moving averages, as displayed on the accompanying chart; not since June has EWU managed to close a session above all three of its 30-day, 50-day, and 80-day trendlines, which have swatted back every rally attempt in the meantime (with the near-exception of one finish flat with the 80-day on Sept. 27).”
The pound is off nearly 2% this month against the dollar. Without a hedge against volatility, U.S. investors interested in the growth in U.K. markets would be subject to the wild swings in the pound sterling. Since British stock are denominated in the pound sterling, a weaker GBP would mean that USD-denominated returns would be lower after a depreciating in the pound sterling.
If investors are worried about foreign exchange risks, the currency hedged iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU) and the Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) outperform non-hedged U.K. exposure during periods of sterling weakness.
For more information on the U.K., visit our United Kingdom category.