What will 2019 bring for investors?
UK could be the top-performing global market in year of Brexit, say pundits
The market carnage as politicians remain deadlocked over Brexit makes this a great time to buy UK stocks on the cheap, according to investing experts.
One pundit suggests waiting until lorries are backed up along the M20 route to Channel ports as a signal we have truly hit the Brexit bottom.
But there is broad agreement that the UK stock market is set to make a big comeback in 2019 - and could even be the top global performer in the year of Brexit.
Comeback time: Global investors are still shunning UK as we wrestle with Brexit, but experts believe this is a great time to buy stocks on the cheap
We round up the bullish views on UK investments, and the best funds to take advantage of an anticipated rebound next year.
For investors who remain pessimistic about the UK's prospects as we exit the EU, we also look at how to 'Brexit-proof' your portfolio and some funds that could help you hedge against further market ructions.
Buy UK! Optimistic pundits say look to the home front in year of Brexit
Big comeback on cards for the Footsie, but watch out for the pound
'The FTSE 100 will be the best performing global stock market in 2019,' says Nick Dixon, investment director at Aegon UK.
'The UK stock market has underperformed other stock markets since 2015 and now offers very attractive relative value.
'Clarity on Brexit and even modest domestic growth will provide catalysts for the UK market to close the valuation gap with other stock markets. The FTSE 100 could be the big surprise of 2019.'
But he adds: 'The biggest risk investors face is a rise in the pound sterling. The pound is currently in the bottom quartile of its 10-year range, with the currency put through the wringer again recently with the latest round of Brexit twists and turns.
'Despite significant ongoing uncertainty around Britain’s exit from the EU – including the possibility of"no deal’ – we are entering the Brexit end-game with all sides seeking an amicable and economically sensible deal.
'An agreement remains the most likely outcome. This will provide greater trading certainty, higher confidence in the UK, and hence higher value for the pound sterling.
'This will reduce the pound value of global assets in investors’ portfolios and could reverse gains made following the 2016 Brexit vote.'
UK has already underperformed, is potentially cheap and offers a meaty dividend yield
'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,' according to Russ Mould, investment director AJ Bell,
Mould also predicted the FTSE 100 might make a concerted attack on 8,000 in 2018 - and it did top 7,900 at one point.
He says now: '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 further political upset in Westminster in the form of a call from the Labour Party for a vote on 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.
'After all, the index is already trading at levels last seen in December 2016 and even languishes below the high reached at the climax of the technology bubble in December 1999.
'As such, a good degree of bad news may already be factored into the valuation of UK assets, especially as the pound is still trading some 13.5 per cent below where it stood on the day of the EU referendum in June 2016.
'In the event of a"hard" Brexit or"no deal" scenario it is easy to envisage further substantial drops in sterling.
'That could help to fire the FTSE 100 higher, as it did in June 2016, given how two-thirds of the index’s earnings hail from overseas, even if the"sterling down, FTSE up" trade has admittedly been less successful of late.
'In the event of a"soft" Brexit, or an unexpected delay in the invocation of Article 50, the FTSE 100 could enjoy a relief rally as some of the uncertainty is lifted – although any sense of relief could dissipate if that scenario merely leads to a more protracted and equally fractious negotiation period.
'Such doubts aside, the UK stock market does have three things going for it: it has already underperformed, it is potentially cheap and it offers a meaty dividend yield.'
Mould says the chart below shows how in total return, sterling terms, the FTSE 100 has underperformed relative to its global peers in 2018.
'It has done less well than the USA, Japan, Eastern Europe, Latin America, Western Europe and Asia, faring better than only the Africa/Middle East region. Data from EFPR [accountancy group] shows that $20.6billion has been withdrawn from UK equity funds since the EU referendum, so the UK equity market is unloved.
'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.'
UK market performance vs global peers in 2018
Above: Maybe wait for lorries to start backing up on the M20 - then buy.
'Is the UK a"classic contrarian" opportunity? Even the much hated UK equity market could offer up a surprising experience in 2019, particularly if there is a further deterioration in sentiment over our chaotic exit from the European Union,' says Thomas Becket, chief investment officer of Psigma.
'We have long forecast that achieving any sustainable deal that pleased all sides was almost impossible and we expect a continuation of the fluid and volatile situation we have seen over the last two and a half long years.
'We also need to stress that we see Brexit both as an opportunity as well as a risk for investors, even if many commentators only focus on the negative side of an investor’s equation.
'It might well be that we wait for a further deterioration in sentiment (maybe wait for the lorries to start backing up on the M20 from Dover), but with UK assets now distrusted and shunned by most global investors and approaching historically cheap absolute and relative valuations, investors should not throw the towel in on their UK investments.'
How come overseas firms want to buy UK companies, yet global fund managers won’t invest here?
'The UK on many measures looks cheap,' says Ben Yearsley, director of Shore Financial Planning.
'The market sits around its 40 year price earnings average of about 14x earnings, but that masks companies with dollar earnings on much higher ratings and domestically focused companies on single figure PEs.
'The following two graphs (courtesy of Man GLG) show the UK versus the world on a PE basis and then the UK dividend yield against the gilt yield [return you get for holding UK government bonds].
'Dividends haven’t yielded this much over gilts since the Second World War. In my view the dividend yield means you are being paid to hold equities and wait for a recovery.'
UK vs world looks cheap
UK dividend yield looks attractive vs the gilt yield
'One of the most fascinating facts of 2018 is that overseas companies are happy to buy out British businesses – Sky and Shire are two recent examples, but global fund managers won’t invest here,' Yearsley goes on.
'This leads me to believe there is good long term value to be found in the UK as otherwise business wouldn’t invest.'
On Brexit, he adds: 'It’s reasonably simple to position for Brexit... however the outcomes in my view are binary. In other words, a soft Brexit will lead to one outcome and a hard Brexit the other.
'So I wouldn’t bet the ranch either way – sitting on the fence for once and getting splinters is probably the best option!
'A good soft Brexit will lead to a strengthening currency and a mild stock market bounce - the bounce will be led by domestically focused stocks.
'A hard Brexit will lead to a sharply falling currency and probably a stock market fall – I don’t think the dollar earners will save the FTSE this time.
'A soft Brexit is still the most likely outcome (despite parliamentary shenanigans) and therefore you want sterling assets and more domestically focused companies.'
UK market could be a top global performer in the year of Brexit
'The unrelenting negativity that investors are demonstrating towards UK equities is making me feel more and more positive on their prospects for 2019,' says Alex Wright, portfolio manager for the Fidelity Special Situations fund and the Fidelity Special Values investment trust.
'It might be counterintuitive to think that the UK market could be among the top performers globally in the year that we leave the EU (if indeed we do). But markets have a way of confounding expectations and surprising the consensus.
'I do not have a view on whether a soft or hard Brexit is more likely. My positive outlook for UK equities simply relies on some clarification in the relationship between the UK and the EU, which would act as a catalyst for investors to revisit the UK equity market as a destination for capital.
'It may be a cliché, but investors really do hate uncertainty, and for global asset allocators, there has been little incentive to do the work on cheap UK shares.'
Which shares look cheap or like good income earners?
Russ Mould of AJ Bell rounds up the 20 cheapest FTSE 100 stocks and 20 with the highest forecast 2019 dividend yields below.
'In total, 31 FTSE 100 firms trade on a price/earnings ratio of 10 times or less for 2019, he says.
'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.'
'It is also possible to argue that the UK looks attractive on a yield basis, as the FTSE 100 offers a prospective yield of 4.9 per cent based on aggregate consensus analysts’ forecasts for 2019,' says Mould.
'This beats the 0.75 per cent Bank of England base rate pretty handily and also outstrips the 1.25 per cent yield available on the benchmark, 10-year UK government bond, or gilt.
'There are 36 firms within the FTSE 100 which offer a yield of more than 5.5 per cent.
'The yield available from those 36 stocks, and the index overall, does at least mean that investors will be compensated at least to some degree for the risk they are taking with UK equities while they patiently wait to see how the political shenanigans in Westminster and negotiations with Brussels ultimately pan out.'
Which UK funds should you consider for 2019?
Investment experts offer UK fund tips for the year of Brexit.
'The best time to invest is often when things look like they couldn’t get any worse,' says Khalaf. 'There aren’t many stock markets less fashionable than the UK at the moment – largely because of Brexit uncertainty. But shorter-term political struggles don’t turn good businesses bad overnight.
'The UK stock market is still one of the best places to get income: it’s currently yielding 4.2 per cent, and Threadneedle UK Equity Income is one of our favourite ways to invest in some of the UK’s best dividend-paying companies.
'It’s run by Richard Colwell, an experienced equity income manager with a great track record.
'Edinburgh Investment Trust trades on a discount to net asset value of 8.3 per cent. It invests in lots of solid UK business that will almost certainly survive Brexit.
What does 2019 have in store for your investments?
'This is important because as well as aiming to grow your investment over the long-term, Barnett tries to pay high and rising dividends. Profitable, cash-generative companies should be well-placed to do this.'
Adrian Lowcock, Willis Owen: Investec UK Alpha.
'Simon Brazier blends fundamental company research with economic analysis and believes that a clear understanding of the thematic background is essential.' says Lowock.
'He then meets company managers, which he sees as key to his approach. His assessment of a company management’s track record, strategy, and allocation of free cash flow are vital parts of the research framework, alongside a thorough valuation analysis that considers both the upside potential and downside risk of any investment.
'The manager’s approach is flexible and pragmatic and he constantly seeks to balance out the risk/reward opportunities not only at the individual stock level but, more importantly, at an overall fund level.'
In a soft Brexit, the most likely outcome, you will want to hold sterling assets and domestically-focused stocks, according to Yearsley.
'One clear portfolio springs to mind for this is Mark Barnett of Invesco Perpetual Income and High Income fame (and various investment trusts such as Perpetual Income & Growth).
'He has over 30 per cent in UK domestic value stocks - many of these stocks are trading on single figure price/earnings ratios.
'However he also has some overseas earners and more defensive stocks so it’s a decent all round portfolio.
'A UK fund is M&G Recovery. The UK has been beaten up mainly due to Brexit negotiations and the threat of a Corbyn government, which has led to many segments of the market looking cheap.
'This is one of a number of funds that you could buy but I’ve always liked the approach of Tom Dobell the manager in accessing cheap but interesting UK companies.'
'It's time to be picky': Where to invest in tricky times
'Our favoured active funds in UK equities remain Artemis Income, which has a value bias, and Royal London UK Equity Income, where the manager favours opportunities amongst mid cap companies that could see a reversal next year in the negative sentiment that has afflicted them in recent months.'
What if you are pessimistic about Brexit?
'It is understandable that UK investors are looking for safe havens in the market given the great uncertainty that Brexit still represents,' says Ed Monk, associate director for Personal Investing at Fidelity International.
'Switching your investments wholesale to avoid one particular outcome, however, is rarely a winning investment strategy.
'While there may be stocks that are currently priced at what seems to be a"Brexit discount", there are also sure to be"value traps" where the current low price is more than justified.
'One way to mitigate this uncertainty is not to bet on a particular outcome and instead, remain committed to investing a set amount on a regular basis across a spread of investments - from equities to bonds, to cash.
'By adopting this strategy you remove your in-built biases and assumptions and automatically, and dispassionately, invest more when prices are low and less when prices are high - a process known as pound cost averaging that reduces your losses in falling markets.'
Which funds can help you 'Brexit-proof' your portfolio?
'Managed by Nick Train, Lindsell Train UK Equity fund aims to capitalise on global consumer brands; owners of media or software intellectual and capital market proxies,' says Monk.
'The fund looks for undervalued, profitable companies whose brands and market positions allow them to"offer something truly unique". Companies such as Unilever and Diageo make up one fifth of the fund.
'Fidelity Global Dividend Fund, run by Dan Roberts, invests in resilient businesses that can offer the prospect of long-term income growth and capital protection.
'Global Dividend is well diversified and defensive, tending to perform well when recent hot sectors like technology do not.
'With a focus on high-quality, growing dividend streams, the fund is also designed to protect against rising inflation. It feels like 2019 could be this fund’s year.
'Gold-related investments could also add a further element of stability. One way of doing this is to invest around five per cent into a gold fund, such as the Investec Global Gold Fund.
'This fund provides exposure to gold via a diversified portfolio of gold mining company shares.
Finally, the Fidelity Select 50 Balanced Fund, which offers a new one-stop way of investing across different asset classes and all around the world.
'This fund, managed by Ayesha Akbar, has navigated a steady course through 2018’s volatile markets. Ahead of another uncertain year, that stability is likely to remain a big attraction in 2019.
Laith Khalaf, Hargreaves Lansdown: Personal Assets Trust
'Personal Assets Trust offers something completely different. The aim is to preserve and increase your investment over the long-term,' says Khalaf.
'So if you’re worried about Brexit, or wider global issues, it’s the type of trust that might appeal. It could protect wealth already built up, but maintain the potential for some growth.
'There are currently four main elements: the shares of larger companies (often with dominant market positions), some inflation protection from US government bonds, gold bullion as a long-term store of wealth, and almost a quarter held in cash.
'This balanced approach is likely to look dull when stock markets are rising rapidly, but it can come into its own when they fall.'
'If you think hard Brexit is the outcome you don’t want UK investments and want to avoid sterling. In that scenario any non UK equities (or fixed interest) are what you want. So go global.
'A good global growth fund is First State Global Listed Infrastructure - it’s only got 6 per cent in the UK, or Blue Whale Growth which has 10 per cent in the UK.
'The problem with most fixed interest funds is they are often hedged back into sterling so you don’t get the bounce from a falling pound even if they have overseas investments.
'Finally for those of a more nervous disposition a fund such as Architas Diversified Real Assets is worth a look.
'It looks to deliver cash plus 4 per cent by investing, as the name suggests, in a portfolio of investments underpinned by real assets that have a low correlation to bonds and equities.
'It has a weird and wonderful portfolio of aircraft leasing, social housing and catastrophe reinsurance to name a few.'
This article was written by Tanya Jefferies from This is Money (Daily Mail) and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.