For years we’ve been waiting for Brexit uncertainty to end so that companies can plan their futures with a bit more clarity, and investors can have more confidence in the outlook for the FTSE 100.
The financial markets did get a bit of a boost from the Conservative election victory, but then Boris just had to come up with his plan to make it unlawful for exit deal negotiations to extend beyond the end of 2020. And the renewed confidence drained again, as the chances of a no-deal departure resurfaced. Sigh.
But I’m still optimistic for the coming year, and here are three reasons why I think the Footsie could end the year above 8,500 points.
Brexit
Yes, it is the big one, and though I can’t see any good reason behind the PM’s latest twist, I can’t bring myself to believe that he would be so stupid as to crash us out of the EU with no trade deal. The government has such a big majority that it it no longer needs to pander to the right wing of the party who often appear to have a ‘no contact with foreigners’ mentality, and the focus can move to what’s best for British companies, their employees, and their investors.
I’m still optimistic.
Dividends
FTSE 100 dividends over the past few years have been growing, and at the last check, AJ Bell found a forecast yield for the full year of 4.8%. I’m certainly not complaining, but historically that really is pretty high.
Even going back only as far as 2017, the Footsie was yielding approximately 4.2%, and back over the longer term it’s tended to yield between 3.5% and 4%.
It’s really all down to a divergence between company earnings (and the resulting dividends they can pay from them) and share prices. And even while a number of companies have been feeling the Brexit pinch, it’s largely been the retail sector that’s been struggling as folks have been reining in their spending.
The rest of the companies in the index have actually been doing fine, but all the uncertainty has kept people scared of shares. Financial stocks perhaps show it best — share prices have been performing dreadfully, even though our banks, insurers and more have been recording decent earnings.
It all suggests to me that share prices should be higher, more in line with current earnings levels, dropping dividend yields closer to their long-term expectations.
Gold?
Money that would otherwise have been invested in the stock market has to go somewhere, and over the past four years, the gold price has been on a bull run.
An ounce of the shiny stuff has risen from a low point of approximately $1,050 at the end of 2015, to around $1,510 today. That’s a four-year gain of 44%, and that suggests a lot of money that would have been heading into global stock markets has been finding itself heading for the safety of gold instead. It could return, however.
In reality, 2020 is too short a horizon for any prediction, so my 8,500 suggestion is just a bit of fun. But I really do think we could be entering a great decade for shares.
