Post the U.K.’s decision to part ways with the EU, the region has been cast into widespread uncertainty. Mirroring the apprehensions, the Flash Composite PMI of the economy fell to 47.7, indicating economic contraction, and the sterling fell drastically against the dollar. However, the release of second-quarter data pertaining to the economy indicates an improvement, particularly in the short run. The economy appears to be on the rise and recent surveys point to positive sentiments. Moreover, the devalued currency may be a boon in disguise.
Although the second-quarter figures signify strengthening of the economy and minimal impact of the Brexit referendum, many analysts believe that the data does not fully reveal the extent of the impact as the quarter accounted for a short post-vote period. However, other surveys display a rebound in figures, marking a drastic improvement from the steep lows following the vote. (Read: Will Financial ETFs Forget Brexit and Gain on Decent Q2 Earnings?)
Let’s take a look at what the latest data indicates.
Rising Consumer Spending
The country’s vote to leave the EU seems to have had no impact on the economy in the second quarter of 2016. UK GDP in the quarter inched up 0.6%, higher than the first-quarter increase of 0.4%. This indicates annual growth of 2.2%. The country’s primary growth driver is the increase in household spending, accounting for roughly two-thirds of the economy. Households spending grew 0.9% in the second quarter from the preceding quarter.
Shoppers in the U.K. have shown no restrain post the vote, contrary to expectations. Retail sales in the second quarter rose 0.9% from the previous quarter. Moreover, a survey conducted by CBI shows retail sales have grown in the year to August and are expected to grow in the year to September as well. August saw retailers reporting the highest sales in six months with the depreciated pound making shopping attractive for overseas buyers.
Additionally, the unemployment rate in the country fell unexpectedly to 4.9% in the second quarter of 2016 from 5.6% in the prior-year quarter. In July, the number of individuals claiming unemployment benefits fell by 8,600 as compared to June. The average weekly earnings for employees, including bonuses, increased 2.4% compared with the figure reported a year ago, indicating increased spending capacity. (Read: UK Votes for Brexit; ETF Winners & Losers)
Business Sentiments Optimistic
Business sentiments in the economy have also recovered with a 0.5% increase from the first quarter and a 0.9% rise from the second quarter of 2015. This follows two consecutive quarters of decline. The business sentiment in the country was relatively sensitive due to the vote but remained “fairly resilient” as per Thomas Laskey from Aberdeen Asset Management.
As per Reuters, the financial markets appear to be making a comeback post Brexit. The FTSE 100 has increased 8%, possibly due to a lower pound creating currency tailwinds. Meanwhile, the FTSE 250, which is more focused on the domestic economy, has risen 5% after the referendum.
Additionally, the service sector improved 0.5% in the second quarter. In June 2016, the services index has been projected to increase 2.4% from June 2015, with business services and finance contributing the highest growth rate of 1.1%.
The rental housing prices in the country have also risen 2.4% till the year ending July 2016, in line with the rise till the year ending till June. This is in sharp contradiction to the projections of a decline in real estate prices post Brexit.
ETFs
The U.K. economy is slowly turning around with the falling pound making retail shopping as well as exports more attractive. Here are some ETFs that have performed quite well post the Brexit vote until August 29.
The iShares MSCI United Kingdom (EWU), one of the most highly exposed funds to the British markets, has seen its price rise 8.8% in the period. With $1.94 billion worth of assets under management and an expense ratio of 0.48%, the fund has provided a total return of 2.73% in the current quarter until August 26. The fund’s total weight in its top 10 holdings is 40.65%, with the largest share in the energy sector.
The iShares Currency Hedged MSCI UK (HEWU), which tracks the MSCI UK ETF with a hedge against the USD, saw its price rise 10.3% in the period. With $0.66 billion worth of assets under management and a net expense ratio of 0.45%, the fund has provided a total return of 3.96% in the current quarter until August 26. The fund invests primarily in the equity market, but also in the money market and forwards.
The First Trust United Kingdom AlphaDEX ETF (FKU) has witnessed roughly 7% rise in price in the period. With $0.42 billion worth of assets under management and an expense ratio of 0.80%, the fund has provided a total return of 5.2% in the current quarter until August 26. The fund’s total weight in its top 10 holdings is 24.86%.
The WisdomTree United Kingdom Hedged Eq ETF (DXPS), which tracks the U.K. equity market while hedging its exposure to currency fluctuations, has seen its price rise 13.3% in the period. With $0.28 billion worth of assets under management and an expense ratio of 0.48%, the fund has provided a total return of 3.91% in the current quarter until August 26. The fund’s total weight in its top 10 holdings is 48.77% while its exposure is highest to the consumer staples sector.
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
ISHARS-UTD KING (EWU): ETF Research Reports
ISHARS-CHM UK (HEWU): ETF Research Reports
FT-UTD KINGDOM (FKU): ETF Research Reports
WISDMTR-UK HEQ (DXPS): ETF Research Reports
Original post
Zacks Investment Research
Although the second-quarter figures signify strengthening of the economy and minimal impact of the Brexit referendum, many analysts believe that the data does not fully reveal the extent of the impact as the quarter accounted for a short post-vote period. However, other surveys display a rebound in figures, marking a drastic improvement from the steep lows following the vote. (Read: Will Financial ETFs Forget Brexit and Gain on Decent Q2 Earnings?)
Let’s take a look at what the latest data indicates.
Rising Consumer Spending
The country’s vote to leave the EU seems to have had no impact on the economy in the second quarter of 2016. UK GDP in the quarter inched up 0.6%, higher than the first-quarter increase of 0.4%. This indicates annual growth of 2.2%. The country’s primary growth driver is the increase in household spending, accounting for roughly two-thirds of the economy. Households spending grew 0.9% in the second quarter from the preceding quarter.
Shoppers in the U.K. have shown no restrain post the vote, contrary to expectations. Retail sales in the second quarter rose 0.9% from the previous quarter. Moreover, a survey conducted by CBI shows retail sales have grown in the year to August and are expected to grow in the year to September as well. August saw retailers reporting the highest sales in six months with the depreciated pound making shopping attractive for overseas buyers.
Additionally, the unemployment rate in the country fell unexpectedly to 4.9% in the second quarter of 2016 from 5.6% in the prior-year quarter. In July, the number of individuals claiming unemployment benefits fell by 8,600 as compared to June. The average weekly earnings for employees, including bonuses, increased 2.4% compared with the figure reported a year ago, indicating increased spending capacity. (Read: UK Votes for Brexit; ETF Winners & Losers)
Business Sentiments Optimistic
Business sentiments in the economy have also recovered with a 0.5% increase from the first quarter and a 0.9% rise from the second quarter of 2015. This follows two consecutive quarters of decline. The business sentiment in the country was relatively sensitive due to the vote but remained “fairly resilient” as per Thomas Laskey from Aberdeen Asset Management.
As per Reuters, the financial markets appear to be making a comeback post Brexit. The FTSE 100 has increased 8%, possibly due to a lower pound creating currency tailwinds. Meanwhile, the FTSE 250, which is more focused on the domestic economy, has risen 5% after the referendum.
Additionally, the service sector improved 0.5% in the second quarter. In June 2016, the services index has been projected to increase 2.4% from June 2015, with business services and finance contributing the highest growth rate of 1.1%.
The rental housing prices in the country have also risen 2.4% till the year ending July 2016, in line with the rise till the year ending till June. This is in sharp contradiction to the projections of a decline in real estate prices post Brexit.
ETFs
The U.K. economy is slowly turning around with the falling pound making retail shopping as well as exports more attractive. Here are some ETFs that have performed quite well post the Brexit vote until August 29.
The iShares MSCI United Kingdom (EWU), one of the most highly exposed funds to the British markets, has seen its price rise 8.8% in the period. With $1.94 billion worth of assets under management and an expense ratio of 0.48%, the fund has provided a total return of 2.73% in the current quarter until August 26. The fund’s total weight in its top 10 holdings is 40.65%, with the largest share in the energy sector.
The iShares Currency Hedged MSCI UK (HEWU), which tracks the MSCI UK ETF with a hedge against the USD, saw its price rise 10.3% in the period. With $0.66 billion worth of assets under management and a net expense ratio of 0.45%, the fund has provided a total return of 3.96% in the current quarter until August 26. The fund invests primarily in the equity market, but also in the money market and forwards.
The First Trust United Kingdom AlphaDEX ETF (FKU) has witnessed roughly 7% rise in price in the period. With $0.42 billion worth of assets under management and an expense ratio of 0.80%, the fund has provided a total return of 5.2% in the current quarter until August 26. The fund’s total weight in its top 10 holdings is 24.86%.
The WisdomTree United Kingdom Hedged Eq ETF (DXPS), which tracks the U.K. equity market while hedging its exposure to currency fluctuations, has seen its price rise 13.3% in the period. With $0.28 billion worth of assets under management and an expense ratio of 0.48%, the fund has provided a total return of 3.91% in the current quarter until August 26. The fund’s total weight in its top 10 holdings is 48.77% while its exposure is highest to the consumer staples sector.
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
ISHARS-UTD KING (EWU): ETF Research Reports
ISHARS-CHM UK (HEWU): ETF Research Reports
FT-UTD KINGDOM (FKU): ETF Research Reports
WISDMTR-UK HEQ (DXPS): ETF Research Reports
Original post
Zacks Investment Research
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