We ended 2019 with bright prospects for the UK stock market, after years of Brexit uncertainty. And I really thought we were headed for a bullish 2020, with little risk of a no-deal EU departure.
But what a difference a month can make. Since a peak on 17 January, the FTSE 100 has fallen by 3.2%. A fluctuation of that size, in itself, might not be a big deal. But with Prime Minister Boris Johnson having committed us to do-or-die trade negotiations by the end of the year, the spectre of a no-deal Brexit is very much back.
And Boris’s usual hand-waving approach to dismissing problems that others see as all too real seems optimistic. Voices from across the EU are increasingly casting doubt on such a timescale, and suggesting talks could be far tougher than the PM thinks.
With serious new doubts arising, we’re facing yet another year of Brexit uncertainty. But could it result in a 2020 stock market crash? Yes, I think it could.
For one thing, it’s not just the UK’s Brexit problems; there are disturbing signs from the US too. Increasing tension with Iran has had some market indices a bit twitchy since the start of the year. And there are fears of continued weak corporate earnings.
Then there’s China and the possibly worldwide effect of any further trade war. Think Donald Trump will lose the 2020 presidential election? So far, I’m not seeing any leading Democrat candidate who’s likely to appeal to the middle ground of the US electorate. And that’s surely where the vote will be won and lost.
Another four years of President Trump, boosted in confidence by a second victory, and with his gung-ho approach based on an idiosyncratic understanding of economics and diplomacy? I don’t see that as a recipe for global economic success.
But, you do know what to make when you’re handed lemons, don’t you? Yep, lemonade.
I think a market crash would extend the excellent stock buying opportunities we’ve seen, on and off, since the financial crisis.
The FTSE 100 is expected to deliver a 4.7% dividend yield in 2020, and that’s a good bit higher than the long-term average. According to AJ Bell, it would amount to a total of £91.1bn handed out to shareholders. While growth in annual dividends is slowing a little, that would still be a record amount of money for us to chase.
It also suggests to me that UK shares are still cheap by historical standards, and I have a number of tempting opportunities lined up as potential investments in 2020.
If my take on share undervaluation is accurate, and if fears of a crash (or even just a downturn) come true, I reckon we could be in for a period of even cheaper shares. But which shares should we buy?
I’m keeping my eyes on stocks paying good dividends. Not necessarily the biggest dividends, but ones that look dependable and well covered by earnings. If share prices do dip, I’ll be looking to secure some enhanced long-term dividend income. Share price falls themselves wouldn’t bother me, as I’d expect them to recover over the long term.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed 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.