EWU: New PM Lifts British Stocks

November 02, 2022

After a succession of prime ministers, finance ministers and general governing chaos, investors seeking a silver lining in the British Isles may consider checking out the iShares United Kingdom MSCI ETF (EWU)

The fund appears to have bottomed, meaning upside may be in store especially given recent changes in the U.K. leadership. Conservative Rishi Sunak became prime minister last month, the third since Boris Johnson’s July resignation, which had been followed by Liz Truss’ disastrous, historic 44-day term. Truss resigned after her new finance minister’s poorly timed proposal to cut taxes and boost unfunded spending.  

Sunak, the first British leader with Indian heritage, with a net worth of about 730m GBP ($838 million), according to the Times (his father-in-law co-founded the major Indian IT services firm, while Sunak himself is a former Goldman Sachs banker).  

His return was greeted by rising stocks in the U.K.  

Bearish Trend in EWU Since 2008 

EWU holds a portfolio of the leading British stocks. Since 2008, EWU has made lower highs and lower lows.

 

Source: Barchart 

 

At $28.02 on Oct. 31, EWU was 49% lower than its 2008 peak of $54.76. Over a similar time period, the most liquid and diversified U.S. stock market ETF, the SPDR S&P 500 ETF Trust (SPY), more than doubled from October 2007 when it reached $386.25 on Oct. 31, 2022. 

U.S. stocks have far outperformed their British counterparts over the past years.  

Signs of a Bottom 

EWU had dropped 15% this year through the end of October, reaching $28.02. Meanwhile, SPY had lost 19% so, after years of underperformance, EWU is doing better this year than SPY. EWU’s trading pattern over the past three years has been constructive.  

 

Source: Barchart  

 

EWU has made higher lows and higher highs since March 2020, when the pandemic and Brexit hammered British equities.  

Pound Has Bottomed 

The recent U.K. political turmoil pushed the British pound to its lowest level against the U.S. dollar since 1985.

 

Source: Barchart  

 

The above long-term chart shows the pound falling to $1.03485 against the dollar in September. The last time the pound/dollar currency relationship was lower was in 1985, when it traded to a low of $1.03450.  

While the pound came close, it held that critical technical support level and turned higher. The pound was just below the $1.15 level on Oct. 31 and appears to have bottomed.  

UK Rally Might Continue 

Three factors might push the pound and EWU higher over the coming weeks and months: 

  • Markets appear to support Sunak. After the Brexit and scandal turmoil under Johnson and the fears under Truss, market participants are embracing the potential for stability under the new leader. 
  • Sunak’s focus on fiscal discipline could restore investor confidence as the U.K. faces the challenges of Brexit and the Russia/Ukraine war.  
  • Investors are searching for value in global markets, and the U.K. with a stabilizing political system might turn out to be an oasis next year.  

Meanwhile, the pound gaining against the dollar would boost British share prices and EWU. 

Investing in EWU is a bet on the new government. The current price level is attractive after years of disappointing performance, and U.K. stocks could be the place to be in the near future.

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