By Carl Delfeld of the Chartwell ETF Advisor
The United Kingdom market and the exchange-traded iShares fund that tracks it (EWU) has benefited from one of the highest interest rates and strongest currencies in the group of G 10 countries. But banking and real estate problems are being translated into a weaker currency and fueling speculation that the next move of the Bank of England will be to cut interest rates to stimulate the economy and help real estate markets.
The pound on Monday fell to a 14-month low against the euro and dropped below $2 against the dollar for the first time in a month. A weaker pound has a negative effect on returns for American investors in the UK exchange-traded fund which is unhedged.
Sterling fell to a low of £0.6962 against the euro, its weakest level since July 2006, before pulling back to stand down 0.5 per cent at £0.6951 by late trade in New York. The pound dropped 0.6 per cent to $1.9945 against the dollar, having hit a low of $1.9916 in the session. Sterling also fell 0.6 per cent to Y230 against the yen and 0.6 per cent to SFr2.3760 against the Swiss franc.
The UK ETF (EWU) is heavily slanted to the financial services sector but is trading at historically attractive valuations. Is current weakness in the ETF and sterling a problem or an opportunity? Find out by joining the Chartwell ETF Advisor.