As I write these words, the FTSE 100 stands at 6,686 points. That’s a shocking fall of 12.8% so far in 2018, and we’ve effectively suffered a lost five years for UK share prices.
At least dividend yields have been averaging around 4% over the same five-year period. And with the best cash ISAs offering only around 1.5% interest, you’d still have been better off in stocks even through such a poor patch.
But how low can the Footsie go, and what might give it a boost in 2019?
Brexit deal
Our current Brexit farce is surely the biggest cause of uncertainty affecting FTSE share prices right now, and the fear that we’ll end up leaving with no Brexit deal at all is pushing even more heavily on stocks.
Should the government get a parliamentary majority supporting its recently negotiated (or a modified) deal, that uncertainty should evaporate — and I’d expect confidence in UK companies to at least partially recover and share prices to regain some of their lost ground.Â
And, perhaps ironically, I think even a no-deal Brexit will ultimately boost shares — I reckon markets will be surprised further down the line to see the bulk of our FTSE 100 companies not collapsing, and instead carrying on doing solid business. Starting from the top, all of the biggest 10 are huge global companies which are really not dependent on the UK economy at all.
And in the short term, the expected collapse of sterling in the event of a no-deal departure should boost share prices too, as they’re all effectively tied to the US dollar.
No trade war
Donald Trump’s trade wars are very scary. Though the USA and China appear to have stepped back from the brink for now, the US President is appearing so increasingly erratic that the world just has no idea what he’ll come up with next.
The growing disconnect between him and reality was further highlighted this week by his attack on the US central bank, the Federal Reserve. In the Trump world, apparently when US stock markets rise it’s all credit to him, but when they fall it’s the Fed’s fault — he’s described the Fed as “the only problem” with the US economy. And that led the Dow Jones to its worst December since 1931.
But I think the reaction is overdone, and if cooler heads can prevail (and there are still many at high levels in the US government), I can see global stock markets moving up again in 2019.
People see sense
Above all else, the key thing that I think really could boost the FTSE 100 in 2019 is investors coming to their senses. Throughout 2018, they’ve been running for the hills — but can they even still see what they’re running from? Here’s what they’re fleeing…
The FTSE 100 has a predicted dividend yield of 4.7% for 2018, rising to 4.9% on 2019 forecasts. That’s the highest it’s been in decades, and it’s down to earnings and dividends rising while share prices have stagnated.
Royal Dutch Shell shares, for example, are on a 6.4% forecast dividend yield, and it has not cut its dividend once since the end of World War II. In fact, around 45 of the FTSE 100’s companies (it varies slightly depending on whose forecasts you use) are offering dividend yields of better than 5%.
I reckon FTSE 100 shares are just too cheap and this should ultimately be corrected.