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Brexit worries have seen the FTSE 100 put in a poor performance for 2018, but what will 2019 bring?

Brexit wrangling will continue into 2019 and beyond, no doubt. So uncertain is the outlook, experts are split on just where the index of blue-chip shares will be this time next year

FTSE sign
French broker SocGen is a bear on UK equities and sees the Footsie tumbling a further 14% next year, which would leave it below 6,000

The Brexit infighting at Westminster appears to have infected the mood in London’s other city, with its sentiment barometer – the FTSE 100 index – down 11% in the last 12 months and looks set to close well below the 7,000 level.

Brexit wrangling will continue into 2019 and beyond, no doubt. So uncertain is the outlook, experts are split on just where the index of blue-chip shares will be this time next year.

French broker SocGen is a bear on UK equities and sees the Footsie tumbling a further 14% next year, which would leave it below 6,000 – a level not seen since early 2016.

In more chipper mood is Russ Mould, the investment director of pensions company AJ Bell, who believes the Footsie could add more than 1,000 points to reside around 8,000 by the end of December 2019.

“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,” he said.

“Granted, it does look as if the UK’s stock market has a lot stacked against it, given the prevailing uncertainty over Brexit, a sluggish economy and the far-from-distant possibility of a further political upset in Westminster in the form of a call from the Labour Party for a vote of no confidence in the government.

“It may not, therefore, pay to be too gung-ho, but even if the FTSE 100 fails to challenge that mark, investors may still be able to prosper through careful stock selection, as the index is packed with companies which either look cheap on an earnings basis, offer a fat dividend yield, or both, after another year of poor overall performance.”

Taking the BISCUIT

Pessimism appears to be the watchword among the majority of analysts as we move into the new year.

“In the words of one institutional international investor, the UK equity market is currently close to being uninvestable, as Brexit concerns – let alone the possibility of a Labour win if a general election was called – weigh heavily,” according to Richard Hunter, an analyst for the share trading giant Interactive Investors.

“In a survey earlier in the year, the FTSE100 ranked last amongst investors (and even below cash as an asset class) as a preferred investment destination.”

He summarises the challenges faced by the UK using a helpful acronym – BISCUIT.

Obviously, B stands for Brexit, an issue we know will rumble on for years to come.

Also guiding sentiment will be interest rates, sterling, China, the US, inflation and Trump.

Some bargain buys

While experts may be split on the outlook for the market, they are united in their recognition that on an individual stock basis, there are some real bargain buys – particularly for income seekers - with the Footsie currently sitting on a yield of 4.4%.

Expected to hand over the largest dividend cheque in the top 100 is the builder Taylor Wimpey PLC (LON:TW.) The prospective yield is 13%, with the payout expected to grow by around a fifth in 2019. Rivals Persimmon PLC (LON:PSN) and Barratt Developments PLC (LON:BDEV) aren’t far behind.

Also up there, with a 12% yield is Russian metals group Evraz PLC (LON:EVR), while Standard Life Aberdeen PLC (LON:SLA) comes in at a smidge under 10%.

The Footsie’s most undervalued stock is International Consolidated Airlines Group PLC (LON:IAG), which trades at just six times next year’s earnings – suggesting the shares are pricing in a global recession.

Insurer Aviva PLC (LON:AV.) at 6.3 times and Taylor Wimpey at 6.4 times are also cheap as chips on a price-to-earnings basis.

“Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 11 times consensus earnings estimates for 2019,” said AJ Bell’s Mould.

“In total, 31 FTSE 100 firms trade on a price/earnings ratio of 10 times or less for 2019.

“Even if some of the earnings forecasts upon which those multiples are based prove optimistic, it is still possible to argue that you can buy good quality UK-listed firms cheaply, especially if you are an overseas investor, with sterling still relatively depressed,” he added.

Bond yields to rise

Away from the equities market, Nick Dixon, the investment director at Dutch pensions group Aegon, thinks the 30-year bull market for government debt will come to an end in 2019.

“Bond yields will rise beyond market expectations, prices are likely to decline, and volatility will increase,” he explained.

“Bonds will be less able to diversify equity risk. Diversified portfolios will be less diversified.”

Dixon reckons the biggest risk investors face is a rise in the value of the pound, which has been decimated by the wrangling over the UK’s exit from the EU and currently stands near its all-time low.

A sharp rise in sterling could affect many of Footsie’s constituents, most of whom make a good slug of their income outside the UK.

Gold to regain lustre

According to both JP Morgan and Bank of America, gold will regain some of its lustre after losing 5% in dollar terms over the last six months.

Certainly, the volatility we have seen over the recent weeks, with the VIX at recent highs, could see investors bail out of the equity roller-coaster ride in favour of the precious metal, which acts as a haven in times of turmoil.

JP Morgan is predicting a 15% rise in the price of gold “as US real rates peak and focus turns to financing the US’s twin deficits when the Fed cycle is near an end”.

If the price follows the American bank’s trajectory, it could be over US$1,400 an ounce this time next year.

While the big investors have the option to switch between equities, fixed income and precious metals, the average private investor doesn’t – unless he or she squirrels hard earned cash into collective investments such as exchange-traded funds, or investment trusts. But where’s the fun in that?

Stock pickers pick

So, who to follow as we head into 2019. In the current market, stock pickers should look to adopt the strategy of Neil Woodford, the fund manager whose star has faded in recent years, rather than the approach taken by more successful contemporaries Terry Smith, founder of Fundsmith, and FE Alpha Manager Nick Train.

Woodford’s preferred approach of focusing on undervalued stocks and sectors may see him outperform, points out Aegon’s Dixon.

Many Smith and Train’s growth stocks are “priced for perfection” and assume high levels of future profit growth which could disappoint.

“Overlooked value has the potential to become more widely recognised next year, as dividend streams prove resilient which the market recognises by applying higher valuation multiples to dividend payers,” Dixon said.

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