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cracked brexit egg

Mutual Fund Education

How to Capitalize on Rising Populism in the UK

David Dierking Jun 06, 2017

In case if you are wondering whether mutual funds are right for you at all, you should read about why mutual funds, in general, should be a part of your portfolio.

What the June 8 Election is all About

The Economic Scene in the UK

On the other hand, the housing market is showing signs of a slowdown. UK housing prices dropped last quarter for the first time in two years and could remain under pressure for the remainder of 2017. Wage growth has been tepid and fell behind the inflation rate for the first time in over two years, meaning that workers are actually starting to experience a decline in purchasing power. What the final Brexit agreement ultimately looks like it could continue to impact any one of these numbers.

A “hard” (or “clean”) Brexit would essentially involve a complete withdrawal from the EU. It would give up any trade benefits and access to the bloc. The UK would be reestablishing itself as an independent entity free to make its own trade rules and policies on immigration. A “soft” Brexit would allow the UK to exit the EU but keep many of the trade, tax and travel benefits that come with membership. A final Brexit agreement could also be anywhere between these extreme options.

The UK’s Equity Market

There’s not much in the way of UK-focused mutual funds available to investors, but on the ETF side, the largest fund by far, the iShares MSCI United Kingdom ETF (EWU), has seen inflows of nearly $500 million thus far in 2017, following outflows of around $300 million in 2016.

Investment Themes to Watch For

Once the UK exits the EU, it loses any trade advantages it has with other EU member nations (assuming there is a hard Brexit in which the UK cuts all ties). It’s estimated that this trade loss could cost UK businesses around $82 billion, while slashing GDP by several percentage points annually. A soft Brexit on the other hand could mute much of that loss, although the degree to which losses could be minimized is unclear. Those in favor of the soft option argue that the UK can recoup EU trade losses through newly negotiated free trade agreements with other nations.

Mutual fund investors looking for exposure to the United Kingdom might be best served looking at European equity options with large UK allocations. Examples include the Vanguard European Stock Index Fund (VEUSX), the Franklin Mutual European Fund (MEURX) and the T. Rowe Price European Stock Fund (PRESX). Each of these funds has a 25-30% allocation to the UK.

The Bottom Line

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