Will the FTSE bounce back or fall further in year ahead?

THE LAST 12 months will go down as hugely disappointing for investors, as global stock markets are ending the year in negative territory and 2019 looks set to be even more turbulent.

Brexit uncertainty has cast a shadow over the UK, but markets have been selling off everywhere, as investors fretted about the US-China trade war, rising interest rates, and the stand-off between the EU and Italy.

This year’s slump is bad news for investors with pension funds and stocks and shares ISAs, although they can hardly complain after a bull market that has run for almost a whole decade.

They have done far better than savers who left their money in cash earning near zero interest rates over the same period. So how tough will the next year be?

IN THE DUMPS

The year started well with global markets rising strongly in January, but the summer was bumpy before a sharp sell-off in October.

The UK’s benchmark FTSE 100 index is down 12 per cent year-to-date, but it is not alone. Figures from MSCI show Europe, Japan and emerging markets falling by exactly the same amount.

The US was the best major performer this year, but it is still down 5 per cent for 2018.

The Hargreaves Lansdown investor confidence index has plunged to a record low and senior analyst Laith Khalaf said: “The index is lower than any time since it was launched in

1995, worse than the tech crash, financial meltdown and eurozone crisis.”

Sentiment is likely to remain down in the dumps until we get some kind of Brexit resolution. He added: “It is a really uncomfortable time given the range of outcomes and political deadlock.”

GLOBAL WORRY

This is not just a UK issue: global investors are more pessimistic about the world economy than at any point since the financial crisis, according to research from Bank of America Merrill Lynch.

Khalaf said this does not mean you should sell up ahead of a crash: “It is unwise to bet on the direction of the stock market in the short term, as it is prone to defy expectations.”

Those who want to take advantage of reduced share prices should drip-feed money into the market rather than paying in big lump sums and make sure their portfolio is balanced among global stocks, bonds, cash and property, he added.

FIGHTING BACK

Others are more optimistic, with Russ Mould, investment director at AJ Bell, saying the darkest hour comes before the dawn: “The FTSE 100 may have a better chance of making it to 8,000 by the end of 2019 than many suspect.”

The index was standing at 6,709 at the close on Friday, so it would have to rise 19 per cent to hit that, but Mould admits it could go the other way: “Brexit uncertainty, the sluggish economy and the possibility of Prime Minister Jeremy Corbyn could knock market confidence.”

Brexit aside, the UK stock market has three things going for it. Mould added: “It has underperformed rival markets, it is potentially cheap and offers a meaty forecast dividend yield of 4.9 per cent in 2019.”

This is an attractive level of income given that the best easy access savings accounts pay just 1.5 per cent.

FUND SUCCESS

Most private investors buy funds rather than individual companies and Fundsmith Equity and Lindsell Train Global Equity remain two of the most popular, offering an international spread of stocks.

Terry Smith’s Fundsmith vehicle is up 4 per cent over 12 months while Michael Lindsell and Nick Train’s fund is up 10 per cent, strong performances when set against drops in global stock markets.

Other popular investment funds include Baillie Gifford American, Legg Mason Japan Equity, Polar Capital Technology and Aberdeen Standard Global Smaller Companies.

Sheridan Admans, investment manager at The Share Centre, predicts greater volatility and lower returns in 2019, particularly if the US-China trade war intensifies.

He also warned that rising US interest rates could drive up borrowing costs around the world, acting as a further break on growth.

Admans tips Japan, Brazil and India to outperform next year, along with the UK if Brexit becomes clearer.

‘The index is lower than after the tech crash, financial meltdown and eurozone crisis’

BIG BOUNCE

As the year draws to a close, British eyes will be fixed on Brexit and Mark Boucher, co-manager of the Smith & Williamson Enterprise Fund, reckons domestically-focused UK stocks could jump 30 per cent on any outcome aside from “no deal” as they are trading at a huge discount to global rivals: “Many domestic UK businesses are still trading well, and, versus global peers, are the cheapest they have been for nearly three decades.”

Although a hard Brexit cannot be ruled out, Boucher still reckons a deal will be struck, which would offer UK investors a Brexit bounce.

Richard Hunter, head of markets at Interactive Investor, advised calm and to ignore short-term political noise and focus on the future, which could be much brighter for the UK: “The smallest change in sentiment could transform the FTSE 100 from an investment frog to a prince in 2019.”

A fairytale ending is just what the UK needs after a year of uncertainty, although right now the prospect looks like make believe.