Will Britain’s Historic Stimulus Boost Lagging U.K. ETFs?

uk united kingdomThe iShares MSCI United Kingdom ETF (NYSE:EWU) has lagged this year under the weight of Britain’s surprise exit from the European Union. Can its new ultra-dovish central banking policy spur a stock rally?

The BOE this week unleashed a historic round of easing aimed at stimulating economic growth. From Bloomberg:

Mark Carney unleashed a package of stimulus, including the Bank of England’s first interest-rate cut in seven years, and said more easing could come as Britain feels the effects of its decision to leave the European Union.

Officials led by the BOE governor voted unanimously to reduce the benchmark by 25 basis points to a record-low 0.25 percent. They split over other elements of the plan that will expand the central bank’s balance sheet by as much as 170 billion pounds ($223 billion) via purchases of gilts and corporate bonds and a lending program for banks.

The move comes amid sharply declining forecasts for Britain’s economy. The BOE responded strongly to the changes, planning to buy 60 billion pounds worth of government bonds, 10 billion pounds in corporate bonds, and possibly a 100 billion pound loan program for struggling banks.

Said Carney, “We took these steps because the economic outlook has changed markedly. Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows.”

Speaking of the financial crisis, this is the first time the BOE has cut rates since 2009.

Investors are no doubt wondering how the stimulus will affect British stocks and ETFs. While the markets didn’t exactly react with a massive rally following the announcement, the moves should put a solid floor underneath British banks, which have been hit particularly hard by the Brexit. At the very least, fears regarding their solvency should be put to rest — for now.

But don’t bet on British indexes posting big gains based on these central banking actions. There’s still a lot of uncertainty surrounding how the U.K. economy will react to exiting the EU, and we won’t see a resolution to that issue for quite some time.

The EWU, which is the largest U.S.-listed ETF that concentrates on British equities, closed at $15.58 on Friday, up $0.01 (+0.06%). EWU has fallen 3.47% since the start of 2016.


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