Believe It: Brexit Isn't All Bad For U.K. ETFs
The Guggenheim CurrencyShares British (NYSE: FXB) is down 10.7 percent over the past month — meaning FXB, which tracks the pound's move against the U.S. dollar, is in a correction. The iShares MSCI United Kingdom ETF (iShares Trust (NYSE: EWU)) is off 7.7 percent over the same period, which means anticipation of Brexit and the subsequent outcome have been a drag on U.K. equities and the sterling.
Looking at this performances, it is easy for investors to get nervous and think that avoiding U.K. stocks and the likes of EWU is the proper course of action. Actually, the opposite could prove to be true.
A Different Perspective
Astute investors realize at least two things. First, many of the FTSE 100's biggest names, plenty of which are also found among EWU's 113 holdings, generate half or more of their revenue outside of the U.K. That says the weaker pound is good for those firms. Second, EWU is up 7 percent since its June 27 bottom.
“Although the precipitous drop in the pound sounds bad, it might actually help the British economy over the long term by acting as a shock absorber to help the economy rebound. We’ve already started to see this effect in the FTSE 100, the index with the 100 largest companies listed on the London Stock Exchange, which has rebounded strongly since the news,” said BlackRock in a recent note.
A quick look at EWU's top 10 holdings, a group that combines for over 40 percent of the ETF's weight, underscores the ETF's leverage to a weaker pound. That group includes pharmaceuticals giants GlaxoSmithKline plc (ADR) (NYSE: GSK) and AstraZeneca plc (ADR)(NYSE: AZN) and oil behemoths Royal Dutch Shell plc (ADR) (NYSE: RDS-A) and BP plc (ADR) (NYSE: BP). Those are just four examples, but each of those companies depend on ex-U.K. markets for the bulk of their revenue.
How Minimal Is $5+ Million?
Still, investors appear pensive, as EWU has lost $5.86 million since the Brexit outcome was absorbed by global financial markets. Then again, less than $6 million on the back of an event like Brexit for a $1.94 billion ETF like EWU is minimal damage.
“As the pound weakens, British products look cheaper to consumers buying items using other currencies. U.K. firms are already dominant in a number of global industries like machinery, pharmaceuticals and precious stones, so firms in the rest of the world in these sectors will have to cut prices or work harder to acquire business, since British prices will become more affordable for international consumers,” according to BlackRock.
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