The FTSE 100 has fallen to a two-year low while the pound is down a hefty 13.5% from where it stood on the day of the EU referendum, at just $1.27. There is clearly much nervousness UK assets.
The volatility of the past few months has seen money pour out of equity funds – some £132 million was pulled out of UK Equity Income funds in October alone, according to latest figures from the Investment Association. Instead many people are looking to safe havens such as cash and gold for protection. But experts say those who are tempted to sell now could miss out on significant gains.
Russ Mould, investment director at AJ Bell, says: “The darkest hour comes before the dawn and with pessimism so pervasive, the FTSE 100 may have a better chance of making it to 8,000 by the end of 2019 than many suspect.”
The main cloud hanging over the market is fear around Brexit and the prospect of a Labour government. Still, the prospect of a no-deal Brexit does have a silver lining for UK corporates - this scenario would likely see the pound plummet, which would boost the overseas earnings of FTSE firms. Meanwhile, with so much pessimism priced into the market, any positive surprises could produce a significant rally.
Mould says that compared to other major stock markets, the UK has three things going for it: it has already underperformed, it is potentially cheap, and it offers a meaty dividend, with a current yield of 4.9%.
Reasons to be – Cautiously – Optimistic?
Certainly retail investors seem cautiously optimistic about the year ahead. Research by Interactive Investor found 30% of investors expect the FTSE 100 to close next year between 7000 and 7500, while a further 13% think it will reach between 7,500 and 8,000. A bullish 8% of those surveyed think the UK stock market will break the 8000 mark in the next 12 months.
At the other end of the spectrum, a third of people think the stock market will finish 2019 somewhere between 6,500 and 7,000, while a gloomy 7% expect it to close the year below 6,000.
Nick Dixon, investment director at Aegon, shares the enthusiasm of the first group. He thinks the FTSE 100 has the potential to be the best performing global stock market in 2019.
“The UK has underperformed other stock markets since 2015 and now offers very attractive relative value. Clarity on Brexit and even modest domestic growth with provide catalysts for it to close the gap with other markets. It could be the big surprise of 2019.” he explains.
‘Immune’ from Brexit Uncertainties
It’s worth bearing in mind of course, that the UK stock market is a very different beast from its economy and the performance of one has little bearing on the other. Around three-quarters of FTSE companies earnings come from overseas and so, perversely, are given a boost when the pound spirals.
Meanwhile, cheap company valuations and low confidence make many British businesses ripe takeover targets in this environment, which can deliver significant returns for shareholders.
Richard Hunter, head of markets at Interactive Investor, adds: “The FTSE 100 offers a degree of comfort at the moment and the yield it offers means investors are being paid to be patient. The index contains some world class companies, some of whom are largely immune from Brexit uncertainties.”
But not all fund managers are convinced. A survey by Bank of America Merrill Lynch reveals that professionals have not been this bearish since 2008, in the height of the financial crisis. Its survey of global fund managers found that they were overall net 39% underweight to the UK, with a 12 percentage point fall in allocation to UK equities in December alone.
Brian Dennehy, managing director at Fund Expert, says things are likely to get worse before they get better. “The FTSE 100 could well reach 8,000 in a year but only after there has been a 25 to 30% correction. But if that analysis proves wrong, we could be nearer 4,000 than 8,000 in 12 months’ time. Anyone who tells you they know for certain is a fool.”
A Tall Order
That pessimism over the UK market may be well founded, with so much uncertainty clouding the horizon. For the FTSE to reach 8,000 it would have to climb more than 20% from its current level - no mean feat.
Terence Moll, chief strategist at Seven Investment Management, points out: “According to Deutschland Bank, nearly 90% of financial assets globally are set to lose money this year. But using history as a guide, calendar years in which equities register double-digit losses tend to be followed by years of positive returns.”
