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2019: the year to play Footsie?

Ed Monk

Ed Monk - Fidelity Personal Investing

A regular fixture in the investment press at this time of year are predictions of where the FTSE 100 will sit in a year’s time.

Wise heads usually shun the opportunity to make these predictions, knowing them to be a mug’s game which will be thrown back in their face in 12 months’ time when they’ve inevitably been proven spectacularly wrong. So naturally, when asked for my prediction recently, I agreed.

Now, of course, I have absolutely no idea where the FTSE 100 will be in a year’s time and nor does anyone else. Apparently most of the predictions being made were pessimistic, with some suggesting the major UK index would fall below 6,000 by December 31 2019, from its level at the time of about 6,700.

It’s not hard to understand that pessimism when you look at the headlines. Trade war, a US federal shutdown, Brexit, more restrictive central banks - there’s no shortage of reasons to be cheerless, not least because these factors do seem to be dragging stock markets right now, notwithstanding the whipsaw recovery this week. The one you can probably add to the list is a potential recession in China, which I see becoming a major preoccupation of markets on 2019.

Yet despite all this, I’m far more optimistic about the Footsie’s prospects. In point of fact I settled on a range of 7,250 to 7,500 for my prediction - so why the optimism?

First, let’s be clear that we’re talking here about the FTSE 100, which is not the same as global markets. Nor is it the same as the whole of the UK stock market, let alone the UK economy. On each of those things, I’m less sunny.

But the FTSE 100 has a particular set of forces acting upon it that I believe will offer it support in 2019. One is the fact that it is dominated by companies which do not rely on the UK economy and which earn in currencies other than sterling, which has been weak.

This means that the index is going to be less exposed to whatever disruption results from Brexit, still scheduled to happen on 29 March. We have seen a pattern since 2016 of sterling falling each time the news suggests a No Deal Brexit has become more likely, and this means a currency boost for the profits of the Footsie’s foreign currency earners.

Moreover, by definition the companies in the FTSE 100 are very large with the resources to plan for each Brexit scenario in good time. This compares to smaller companies in the FTSE 250 or All Share that could suffer more from short-term disruption, should it arise.

Another reason why the FTSE 100 could defy the worst predictions is its current valuation, which is looking reasonable on many measures and decidedly cheap on some. In particular, the dividend yield for the FTSE is currently 4.9%. That will only grow if the index falls from here. The usual important caveats apply - this is based on forecast dividends, which could fail to materialise.

There are reasons, however, to have faith the yield can be delivered. 2019 is bound to bring some dividend casualties but the major payers in the FTSE 100 look solid. And among the 20 companies currently offering the biggest yields in percentage terms, only three cannot cover their dividend from profits.

A yield of nearly 5% will help many of the fears currently stalking the market. If you have a time horizon of three-to-five years, which you should, then now looks a decent entry point for the blue chip UK companies.

One of the simplest was to play the FTSE 100 is through an exchange traded fund, or ETF, which trade on stock exchanges much like shares do but which offer returns close to the index for a low cost.

The iShares FTSE 100 UCITS ETF does the job nicely.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.