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ETFs in Focus as a No-Deal Brexit May be in the Cards

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Now that prime minister Boris Johnson has announced his request to the Queen for the Parliament to be suspended a for a crucial five-week period in ahead of Brexit, chances of a no-deal Brexit are pretty high on Oct 31. After all, a week after taking office, Boris Johnson pledged an additional £2.1 billion to prepare the UK to survive such a situation.

So, it is prudent to analyze the impact on the UK and EU if a no-deal Brexit takes place.

Inside the No-Deal Brexit Procedure

In this scenario, the UK would instantly leave the European Union (EU) with no agreement. Membership of dozens of EU bodies that oversee rules on everything from medicines to trade marks would be seized. And the UK would no longer be a contributor to the EU budget — currently about £9bn a year.

It could be negative for UK trade as the UK government has already said “most tariffs will be abolished for EU goods coming to the UK, if there is no deal. But the EU doesn't have to do the same,” an article published on BBC. Post break-up, the UK needs to be trading on WTO terms, which would also mean border checks for goods, which could cause a holdup at ports.

Like other analysts, we too believe that higher import taxes and transport delays would likely push up inflation. Bank of England governor Mark Carney already noted that in the worst-case scenario, UK shopping bills could rise by 10%, per BBC.

Supermarket company Sainsbury's went on to highlight that the timing of the break-up – October – is all the more difficult as warehouse capacity normally runs short during this time of the year to stock up for Black Friday and Christmas.

The BBC article went on to highlight that a no-deal Brexit could be detrimental to the UK service industry as it would lose all access to the EU single market.

What Lies Ahead of Pound ETF?

The future run of pound depends on whether the UK can clinch a good deal with EU in settling the divorce procedure. Per a forex analyst, “sterling firmed to its best levels in almost a month against the euro on Tuesday, as market participants grew increasingly optimistic that the UK would avoid a no-deal Brexit.”However, with concerns coming back, things may not be too smooth for the pound ETF in the coming days.

The pound came under pressure after the news of parliament suspension. Invesco CurrencyShares British Pound Sterling Trust (FXB - Free Report) is down 0.2% in the past month (as of Aug 28, 2019) and lost more than 0.6% on Aug 28.

What Waits For UK ETF?

The weaker pound could boost the share price of internationally exposed UK companies. iShares MSCI United Kingdom ETF (EWU - Free Report) consists of big export-oriented names, at least the top-10-exposure does so. HSBC (6.62%), BP plc (5.6%) and Royal Dutch (5.5%) take the top three positions in the fund.

Investors should note that Sterling has lost 18% against the dollar since the referendum more than three years ago. This has resulted in a number of overseas acquisitions in the UK.  Acquisitions jumped by the highest number in 2018 in at least 15 years.

However, small-cap UK ETF iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report) may feel the pain as any kind of domestic slowdown or investment loss could affect the fund deeply. Investors should note that BOE predicts a subdued outlook on investment, which could fall 2% this year and another 1.5% in 2020 (see all European Equity ETFs here).

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