Brexit uncertainty will continue to bedevil the markets in 2020

The FTSE 100 may have finished the year ahead but political considerations will have a huge impact on the economy, says James Moore

What’s the outlook for 2020? It very much depends on this man (AFP/Getty)

Brexit uncertainty cast a dark cloud over 2019 and it’s going to do the same in 2020. A hard Brexit looms, with the chances of no deal by the back door if Boris Johnson goes for the worst option for his country scarily high. For the markets, 2019 provided something of a rollercoaster ride, but the FTSE 100 was in positive territory throughout, ending the year at 7,542.44, some 12.1 per cent higher than 2018’s lousy 6,728.13.

The blue-chip index is dominated by big, international companies with international earnings. Given the mess our dismal politicians (from both sides) have made of the domestic economy, it’s proved to be a good place to have money. Even with clouds of uncertainty overshadowing everything, that should hold true in 2020. Our experts certainly think so.

Last year’s results were mixed. When it comes to our panel’s stocks to watch, I gave contributors some leeway, allowing them to forecast the FTSE based on deal/no deal and, to add an insurance, pick in addition to their main selection in case of an adverse, or even a positive, Brexit outcome. When it came to their market forecasts, the lowest guess was 6,000 (no deal) while the highest was 8,000 (deal).

IG’s Chris Beauchamp got uncannily close. His call of 7,500 was just 42.44 out. I therefore honour him with the newly created Order of the Crystal Ball, First Class. If we take the main choices of each of our tipsters, seven out of nine – International Consolidated Airlines (British Airways, Iberian etc); OneSavings Bank; Randgold, which became part of Barrick Gold and hopped over to New York; Balfour Beatty; Prudential; Lloyds Banking Group; and DS Smith – ended in positive territory.

The portfolio was dragged down by NMC Healthcare, a rapidly expanding health provider in the United Arab Emirates, which was a little down on the year until it suddenly and dramatically fell out of bed after a report by US short-seller Muddy Waters that claimed “serious doubts” over the group’s finances. A detailed rebuttal followed, with NMC describing the missive as “false and misleading”. It failed to lift the shares, which had lost more than a third of their value, wiping in excess of £2bn off the group’s value.

It underlines the difficulty of this sort of exercise. With only a small line-up of stocks, it only takes one to go wrong to derail the whole thing. NMC’s unexpected woes serve to underline the importance of having a broad-based portfolio if you’re investing for real. My own pick of HSBC didn’t help out much. After a tumultuous year in which the CEO was ousted, it also finished in the negative column, although not quite to the same extent. Combined, our nine would have turned £9,000 into £9,606. The same amount in a FTSE 100 tracker would have given you £1,080.

In the old days when The Independent’s journalists put together a 10-strong portfolio, we beat the market for five straight years under my helm. Of late, I fear someone must have put kryptonite into my stock-tipping tea.

Before embarking on the predictions and stocks to watch, a word of warning. This features is intended to be fun. If you’re interested in investing in stocks, consider your personal circumstances, your appetite for risk and whether you might be better off taking advice first. And always, always, do your research. As ever, a big thank you to our panel of City pros for being bold enough to step forward and join us in the crystal ball game. As this feature’s editor, I go first, although given my recent history you might be best to skip this section and start off with The Independent’s assistant editor Lucie McInerney.

James Moore, chief business commentator, The Independent

FTSE 100 Forecast: 8,150

The ever-present cloud of uncertainty hanging over Britain has made investors wary of UK equities, which now trade a substantial discount when compared with other developed markets. It’s also worth noting that the FTSE is currently offering an eye-catching forecast dividend yield of 4.7 per cent for 2020. There’s some cause for concern over the level of earnings cover, which is below the ideal two times. Even so, the numbers all suggest there is value to be had in the UK stock market. I’m a natural pessimist, but chuck in the FTSE’s usefulness as a hedge against a falling pound because of the high number of big-dollar companies at the head of affairs, and I’m going to stick my neck out. I think it ends the 2020 comfortably ahead of this year’s close at 8,150.

Stock to Watch: GlaxoSmithKline (1,779p)

I want to pick Aviva. I really do. The insurance company is cheap as chips on valuation grounds and has a chunky dividend yield to boot. Trouble is, the insurer has looked like value for a very long time. There’s a reason for that. It has disappointed for a long time. So I’m going for the safe as houses GSK, which is rebuilding its drug pipeline, has a healthy if not stunning yield and is a dollar company and thus handy to have if the pound hits the buffers again, as I fear it will. I need a winner and while GSK isn’t going to finish 50 per cent ahead like some racy small cap, I think it will give me that.

Lucie McInerney, assistant editor, The Independent 

FTSE 100 Forecast: 7,841.6

From a faltering start to 2019, the FTSE hit its peak in late July at 7,686.61 – only for the escalating tensions between China and the US over trade tariffs to knock several hundred points off – though there was no dip below 7,000. Now, at year-end, the overwhelming Tory majority has injected so much confidence into the market that we are marching back towards that summer high.

January 2020 will be dominated by the countdown to Brexit Day: Friday 31 January. This date, of course, just marks Britain’s move into the “transition period” which will last until the end of the year. The FTSE’s performance will undoubtedly bounce around off the back of the ongoing politicking with the European Union throughout; but the government’s strong majority coupled with the close connection between the Conservatives and business mean share prices should reap some benefits. Bearing all of this in mind, predicting what figure we will land come 31 December 2020 feels a bit like a fool’s errand. But I’ve been asked to do just that, so this particular fool will go for good gains throughout the year, thanks to a pro-business government being somewhat reduced by Brexit and the difficulty of achieving a fully fledged trade deal with the EU. I’m going for 4 per cent growth from the time of writing landing us at 7,841.6.

Stock to Watch: Rightmove (633.6p)

The government’s election manifesto featured the word “build” in various guises on no fewer than 42 occasions. Though the homebuilding stocks all benefited from a Boris bounce following the election result, and many have carded them as smart buys for the next year, the reduction in scope of the Help to Buy scheme means that their futures remain somewhat uncertain. The smart money might be on Rightmove, the online property portal and website. House sales are usually sluggish in the darker winter months, but a new year dawns with a government with a clear mandate which will probably infuse a certain optimism into the housing market. Rightmove’s position as the market leader for prospective housebuyers and those looking to sell, as well as the data they hold in relation to property trends, means they are primed to profit from the expected uptick in market confidence.

Chris Beauchamp, chief market analyst, IG Group

FTSE 100 Forecast: 8,100

Boris Johnson’s win paves the way for a much more benign outlook for UK equities. Indeed, if the blond bombshell can avoid throwing his luck away and sticks to a softer Brexit approach, we could see the FTSE 100 revisit its record high at 7,900, much higher than anyone thinks possible. From there, it is a short hop to 8,100 and new record highs (price only) for the index.

Stock to Watch: Compass Group (1,890p)

A possible beneficiary of the renewed push for Global Britain is Compass Group. This catering star has been one of the best performers on the FTSE 100 over the past few years, with a strong dividend to boot. The global economy appears to have weathered the US/China trade war storm, and while the firm isn’t cheap at 27 times earnings, it still offers the prospect of healthy growth.

Emma Wall, head of investment analysis, Hargreaves Lansdown

FTSE 100 Forecast: 7,884

Christmas has come early for UK stocks, thanks to – finally – some form of political resolution in the shape of a majority Conservative government. We may be ending the year on a high, but it has certainly been a bumpy ride, dominated by macroeconomic factors. Sentiment and currency have driven returns this year; several Brexit delays, a changing of the guard at No 10 Downing Street and the US-China trade war all impacted volatility.

With the FTSE 100, I’m sticking with the Hargreaves Lansdown returns calculator, adding 5 per cent to the level at the time of writing to get to 7,884. Within the UK blue-chip index I expect there will a lot of movement under the hood, with certain sectors, particularly those linked, once again, to political outcomes, doing well. There is one caveat – we crank upwards only if the US stock market does too. If the crash currently being predicted by bond prices comes to fruition, global markets are all going down. Donald Trump will probably inflate things for another year in order to secure re-election, but 2021 looks a lot less rosy.

Stock to Watch: Lloyds Banking Group (62.5p)

Despite gains of around 20 per cent this year, Lloyds Banking Group is still on a price/earnings multiple that puts it way below the average for the UK stock market – in lay terms, it’s cheap. It also passed the latest Bank of England stress test to see if the bank would survive extreme economic scenarios; a 4.7 per cent fall in UK GDP, unemployment rising to 9.2 per cent, a 33 per cent drop in house prices, an increase in interest rates to 4 per cent and a near 30 per cent drop to value of the pound against the US dollar.

Add to this a yield of around 4.85 per cent and it looks an attractive offering for growth and income investors. As with all stock picks, there are no certainties – further Brexit delays or a rapid rise in inflation, both of which are a possibility for 2020, could derail the bank’s prospects.

Andy Brown, head of direct equities, Tilney Asset Management

FTSE 100 Forecast: 7,875

While a political mandate has been delivered to “get Brexit done”, the nature of our exit will still have a big impact on the UK economy. Clearly there is pent-up economic demand, stifled by the Brexit impasse, that will return, but there are also underlying pressures of slower growth. This has manifested itself through a weaker corporate earnings outlook. The shape of the UK market, with heavier relative weightings in oil, materials and industrials, will require more global trade detente. That said, valuations are not overly demanding, particularly in an international context. M&A has been a major factor for markets in recent years and, with lower underlying growth, we would expect this trend to continue. As such we would expect a positive year but with the now normal monthly performance gyrations. Our year end FTSE 100 predication is 7,875

Stock to Watch: Equiniti (206.4p)

A technology-led company that provides services and solutions that support complex and regulated processes. These include shareholder services (registration and administration), employee schemes and investment services. Its big move in recent years was to acquire the Wells Fargo shareholder services operations in the US, a market seven times larger than the UK, but that complements the group offering. This presents an exciting opportunity. Increased levels of stock market-related activity will have a positive impact on Equiniti. It already provides services to more than half of the FTSE100’s companies, which provides a cross-selling opportunity. It has positive cash-flow characteristics that will further strengthen its balance sheet and support a progressive dividend.

Stephen Adams, head of equities, Kames Capital

FTSE 100 Forecast: 8,100

Twenty-twenty is set to be an upswing year in another global mini-cycle with the UK market enjoying some additional catch-up performance on reduced political risk and uncertainty. Sterling strength is likely to take the shine off UK equity performance, particularly in the more international large cap indices. Meanwhile the valuation expansion of 2019 is unlikely to be repeated without a further shift in monetary policy expectations. As a result I expect the FTSE 100 to grind rather than surge higher and would target 8,100 by year-end 2020.

Stock to Watch: Synthomer (353.8p)

My share tip for 2020 is Synthomer, the speciality chemicals maker which was also my pick in 2018. The significant acquisition I was expecting back then did not materialise that year but did take place in 2019 – Omnova – and the benefits in terms of earnings accretion and diversification should be felt in 2020. In the meantime the valuation has become extremely attractive and the cyclical elements of its business should see an improvement in fortunes over the next 12 months.

Fiona Griffiths, senior market analyst, City Index

FTSE 100 Forecast: 8,000 (assuming either a UK/EU Brexit deal or a US/China trade deal)

The Conservatives won the UK election with a resounding majority, so the UK will almost certainly leave the EU on 31 January. While clarity over Brexit and the solid majority boosted the FTSE, the honeymoon period is likely to be short. Hard Brexit concerns have returned to haunt traders. Boris Johnson will not extend the one-year transition period, leaving investors once again fretting over no deal. The same fears that dominated 2019 could continue to pressurise domestic focused stocks in 2020.

Brexit uncertainties that have faced households, businesses and financial markets could continue, so household and particularly business spending could remain depressed, keeping the lid on economic growth. Those FTSE 100 stocks with a domestic focus could have another tough year.

Globally growth is forecast to come in at 3.4 per cent next year. This is important because more than 70 per cent of FTSE 100 constituents are international stocks. Whether this is achieved depends partly on the US-China trade dispute. A deal is in place and, although details are lacking, risk sentiment has been lifted. Signs of further progress could lift global indices, including the FTSE, higher.

Once again, with deep uncertainties heading into 2020, any crystal-ball-gazing figures for the FTSE would depend on a Brexit deal being achieved and a phase 2 US-China trade deal. With a Brexit deal and US-China trade deal, the FTSE 100 could hit 8,300 by 2020 year-end. Either a Brexit deal or a phase 2 US-China trade deal could leave it at 8,000 by 2020 year-end. No Brexit deal and no phase 2 US-China trade deal? A 2020 year-end of 7,500.

Stock to Watch: Diageo (3,200.5p)

The UK outlook is uncertain once again in 2020. Therefore, international stocks, such as Diageo, could be a better bet for 2020. Whilst the drinks group is up 17 per cent so far this year and more than 75 per cent over the past five years, I still believe there is some fizz left in this one. With more than 200 brands in 180 countries, Diageo is well protected from any UK domestic issues. The company has a strong exposure to fast-growing emerging markets, which are expected to maintain strong economic growth across the coming year. Product innovation is strong, and the scale of group and its brands provide competitive advantage. What’s not to like?

Russ Mould, investment director, AJ Bell 

FTSE 100 Forecast: 8,000

The UK stock market has underperformed and it feels unloved, looking at how money has fled the FTSE since the 2016 referendum vote, so it could be undervalued on the basis of both earnings and dividends. Given a fair economic wind, it may not take too much for it to surprise on the upside in 2020 and make a run at the 8,000 mark.Remember that overseas corporations have already taken the chance to swoop on UK-quoted companies, including former FTSE 100 member Merlin, while Just Eat is being chased by two foreign raiders at once. If overseas executives think that there is such good value around, then perhaps investors should take the hint, especially as the FTSE 100 offers a forecast dividend yield of 4.7 per cent for 2020, which beats interest rates on cash and inflation pretty handily.

Stock to Watch: Imperial Brands (1,869p)

American literature professor Joseph Campbell once said: “The cave you fear to enter holds the treasure you seek.” There are lots of reasons to be frightened of Imperial Brands – it has dished out a profit warning, the regulatory pushback on smoking continues unabated, the CEO is leaving, the American authorities are investigating vaping and the gathering momentum in favour of ethical investing means tobacco stocks could be ignored by many portfolio builders.

But a dividend yield of 12 per cent and a price/earnings ratio of barely six price in a lot of the bad news and Imperial’s cash flow still nicely covers the forecast £1.8bn annual dividend payment, even after capital investment, tax, interest and pension contributions. Price increases help to compensate for falling stick volumes and the sale of the cigar business will further bolster the balance sheet. This will feel like a very, very uncomfortable stock to hold – but they are often the best investments.

Garry White, chief investment commentator, Charles Stanley

FTSE 100 Forecast: 7,970

Investment returns are likely to be lower in 2020 than in 2019 and there is almost certainly going to be more volatility. Consensus earnings estimates for many companies seem high – possibly too high – so businesses will have to deliver in terms of profits to justify their rating. However, the consumer remains strong and central banks will continue to prop up markets. Bond yields also remain supportive of equity markets. The FTSE’s high dividend yield comfortably outpaces them, so it’s hard to be bearish. Any surprising twists or turns in the Brexit process or rhetoric that impact sterling will also be a driver of daily market moves. But, as the year progresses the situation should become clearer.

All of this implies a year of “muddling through” with bad news and good news along the way. A modest uplift in the blue-chip index is therefore likely. But watch out for companies that disappoint – their share price will be punished.

Stock to Watch: DS Smith (384.2p)

Shares in recycled packaging group DS Smith have recently pulled back following its latest results after volume growth for the first six months just fell shy of management’s expectations. This has provided an opportunity to buy a company operating in a structural growth market. It offers a good dividend yield and it is in a good position to benefit from rising consumer demand for sustainable packaging and the structural shift to online shopping and parcel deliveries.

The company is at the vanguard of packaging technology and is currently developing a machine that will customise cardboard boxes for specific objects – this could end the trend of huge boxes with a tiny item inside delivered to your door through online purchases. Its mills currently use 100 per cent recovered papers as their primary raw material. This is usually a mixture of old corrugated cases, and recycled newspapers and magazines. Not only do the shares look good value, the company can be regarded as a “green” investment too.