Markets

UK ETF in Focus on Slowest Growth in Nearly a Decade

Britain’s economy delivered economic growth in third-quarter 2019, quelling recession fears for now. The country’s third-quarter flash GDP was 0.3%, comparing favorably with second quarter’s GDP contraction of 0.2%. Technically, two successive quarters of negative growth implies recession. Meanwhile, third-quarter growth slowed to 1% on a year-on-year basis, the slowest since the first quarter of 2010. This also compares unfavorably with 1.3% growth in the second quarter (read: ETFs to See Short-Term Rally on Signs of New Brexit Deal).

Reasons for the Disappointment

The U.K. economy delivered economic growth of 0.3% in July, which contracted 0.2% and 0.1% in August and September, respectively. The month of September was marked with weakness in industrial output and construction activity. Notably, exports rose 5.2% from the previous quarter and imports increased 0.8%. This in turn resulted drove net trade by 1.2%. 

It is being believed that a drop in business investments dealt a heavy blow to GDP growth in the third quarter. Cutting back on factory upgrades and purchases of new equipment by manufacturers hurt business investments. In fact, analysts are of the opinion that due to slowing global economic growth and uncertainty surrounding Brexit, firms are laying off employees.

Looking Forward

It is being widely believed that the U.K. economy has failed to gain momentum following the contraction in the second quarter. Moreover, the buzz is that resilient consumer spending is keeping the U.K. economy afloat and has contributed 0.3% to overall growth. However, a weak jobs market can impact consumer activity by the next year. Moreover, during the first Brexit deadline of Mar 29, firms had engaged largely in stockpiling activities that was followed by a contracting GDP in the second quarter. It is being believed that firms might have resumed stockpiling activities for the Oct 31 deadline, the impact of which might be seen in fourth-quarter 2019 GDP results.

Notably, Britain’s services sector that includes industries like film, TV production and banking performed impressively in the third quarter. With 200 films and 120 high-end TV shows made in the U.K. in 2018, and Netflix deciding to make over 50 TV shows and films in the country through 2020, the trend is expected to continue.

Moreover, the Brexit deadline has been extended to Jan 31, 2020 from Oct 31, 2019. Prime minister Boris Johnson has accepted the extension and urged EU leaders not to allow any more postponements as he readies for a general election before the end of the year.

ETF in Focus

iShares MSCI United Kingdom ETF EWU

The fund provides exposure to large and mid-sized companies in the U.K. and tracks the MSCI United Kingdom Index. It comprises 98 holdings. The fund’s AUM is $2.43 billion and the expense ratio, 0.47%. The fund has returned 11.1% year to date (read: Top ETF Stories of October).

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iShares MSCI United Kingdom ETF (EWU): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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