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Here’s why I think the FTSE 100 could be in for a great 2020

According to Bank of America, which expects world economies to bottom out in the first quarter, stocks “are expected to outperform bonds handily in 2020.”

Now, over the long term that’s not news. In the UK, stocks have been wiping the floor with bonds for more than a century. And what’s likely to happen over the short term can only be estimated with such wide error margins that I don’t think it’s worth acting upon.

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Just stashing away your money in good shares and leaving it there for decades is, in my opinion, likely to be far more cost effective than following advisors who are constantly urging clients to rebalance, move cash between assets, and accumulate charges in the process.

But there does seem to be general bullishness all around, with Morgan Stanley suggesting that UK stocks are the top equity choice for 2020, and that small-cap companies could be the ones to go for.

Cautious

While I agree with the general optimism, I think it needs to be tempered a little for UK investors, because the returns you’re going to get from investing in UK stocks depend on your currency.

Since EU referendum day in 2016, the FTSE 100 is up 20%, which might seem like a surprisingly good result as we’re supposed to have been through three years of chaos, confusion, and a weakening UK economy.

But a fair bit of the apparent Footsie gain is due to the falling value of sterling which, even after a post-election boost, is still down 11% since the Brexit poll. Though the value of the FTSE 100 is denominated in sterling, the actual value of its shares, which are mostly international in nature, is more closely tied to their US dollar earnings.

As an example, a UK investor who bought Unilever shares on referendum day will today be sitting on a share price gain of 37%, while a US investor buying in dollars will be looking at a rise of only 21%. Putting aside the weakness of the pound, UK shares have not done as well in the past three years as it might seem.

Weakness

Of course, it works the other way too. While we still have a year of uncertainty ahead of us on the Brexit front as the government tries to work out a trade deal under Boris Johnson’s self-imposed time restriction, the prospects for UK companies are, I think, the best they’ve been for the past few years. On that score, I agree with those commentators pumping the outlook for UK stocks.

But at the same time, the better economic conditions I hope we’ll see over the next few years should give the pound a boost, and reverse the effect of the past few years. So if the FTSE’s performance turns out to be as good as bullish American banks are suggesting, here in the UK we might not see the same sterling returns as the dollar returns that US investors could enjoy.

Anyway, I am bullish about UK stocks for 2020 and the years ahead, but I think we do need to temper the short-term enthusiasm we’re seeing.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.