Why the FTSE 100 still has a chance to challenge 8,000 in 2019

Russ Mould
17 December 2018

“The darkest hour comes before the dawn and with pessimism so pervasive the FTSE 100 may have a better chance of making it to 8,000 by the end of 2019 than many suspect,” says Russ Mould, AJ Bell investment director. 

“Granted, it does look as if the UK’s stock market has a lot stacked against it, given the prevailing uncertainty over Brexit, a sluggish economy and the far-from-distant possibility of further political upset in Westminster in the form of a call from the Labour Party for a vote on no confidence in the Government. 

“It may not therefore pay to be too gung-ho, but even if the FTSE 100 fails to challenge that mark, investors may still be able to prosper through careful stock selection, as the index is packed with companies which either look cheap on an earnings basis, offer a fat dividend yield, or both, after another year of poor overall performance.

“After all, the index is already trading at levels last seen in December 2016 and even languishes below the high reached at the climax of the technology bubble in December 1999. As such, a good degree of bad news may already be factored into the valuation of UK assets, especially as the pound is still trading some 13.5% below where it stood on the day of the EU referendum in June 2016.

“In the event of a ‘hard’ Brexit or ‘no deal’ scenario is it easy to envisage further substantial drops in sterling. That could help to fire the FTSE 100 higher, as it did in June 2016, given how two-thirds of the index’s earnings hail from overseas, even if the ‘sterling down, FTSE up’ trade has admittedly been less successful of late

“In the event of a ‘soft’ Brexit, or an unexpected delay in the invocation of Article 50, the FTSE 100 could enjoy a relief rally as some of the uncertainty is lifted – although any sense of relief could dissipate if that scenario merely leads to a more protracted and equally fractious negotiation period.

“Such doubts aside, the UK stock market does have three things going for it: it has already underperformed, it is potentially cheap and it offers a meaty dividend yield.

“In total return, sterling terms, the FTSE 100 has underperformed again, relative to its global peers in 2018. It has done less well than the USA, Japan, Eastern Europe, Latin America, Western Europe and Asia, faring better than only the Africa/Middle East region. Data from EFPR shows that $20.6 billion has been withdrawn from UK equity funds since the EU referendum, so the UK equity market is unloved.

 
Source: Refinitiv data. Total returns in sterling terms from 1 January to 12 December 2018. 

“Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 11 times consensus earnings estimates for 2019. 

“In total, 31 FTSE 100 firms trade on a price/earnings ratio of 10 times or less for 2019. Even if some of the earnings forecasts upon which those multiples are based prove optimistic, it is still possible to argue that you can buy good quality UK-listed firms cheaply, especially if you are an overseas investor, with sterling still relatively depressed.

Twenty cheapest FTSE 100 stocks, based on 2019 price/earnings ratio (PE)

 

 

2019E Price/earnings ratio

2019E Earnings per share growth (%)

1

International Cons. Airlines

6.0 x

 (1%)

2

Aviva

6.3 x

7%

3

Taylor Wimpey

6.4 x

1%

4

3i

6.6 x

 (4%)

5

Barclays

6.8 x

11%

6

Barratt Developments

6.9 x

2%

7

Persimmon

7.1 x

2%

8

Glencore

7.2 x

 (0%)

9

Lloyds

7.3 x

0%

10

Legal and General

7.6 x

4%

11

Evraz

7.6 x

 (23%)

12

Smurfit Kappa

7.8 x

1%

13

Royal Bank of Scotland

7.8 x

 (1%)

14

Smith DS

7.9 x

9%

15

WPP

7.9 x

 (3%)

16

Imperial Brands

8.5 x

3%

17

Ashtead

8.6 x

14%

18

British American Tobacco

8.8 x

8%

19

Anglo American

8.9 x

 (1%)

20

Kingfisher

9.0 x

17%

 

FTSE 100

11.3 x

8%

Source: Digital Look, Refinitiv data, consensus analysts’ forecasts

“It is also possible to argue that the UK looks attractive on a yield basis, as the FTSE 100 offers a prospective yield of 4.9% based on aggregate consensus analysts’ forecasts for 2019. 

“This beats the 0.75% Bank of England base rate pretty handily and also outstrips the 1.25% yield available on the benchmark, 10-year UK Government bond, or Gilt.

“There are 36 firms within the FTSE 100 which offer a yield of more than 5.5%.

Twenty highest forecast 2019 dividend yields from FTSE 100 stocks

 

 

2019 E

 

 

Dividend yield

Dividend growth

Dividend cover

1

Taylor Wimpey

13.1%

18%

1.19 x

2

Evraz

12.1%

-12%

1.09 x

3

Persimmon

11.8%

0%

1.20 x

4

Barratt Developments

9.6%

3%

1.51 x

5

Standard Life Aberdeen

9.6%

4%

1.01 x

6

Direct Line

8.9%

5%

1.10 x

7

Imperial Brands

8.7%

10%

1.36 x

8

Aviva

8.6%

11%

1.84 x

9

Centrica

8.4%

-3%

1.09 x

10

Vodafone

8.3%

0%

0.75 x

11

Admiral Group

7.7%

13%

0.97 x

12

British American Tobacco

7.7%

6%

1.49 x

13

SSE

7.5%

-16%

1.24 x

14

Legal and General

7.4%

7%

1.78 x

15

WPP

7.1%

-1%

1.77 x

16

Glencore

6.5%

9%

2.12 x

17

Marks & Spencer

6.5%

0%

1.29 x

18

Lloyds

6.4%

8%

2.14 x

19

TUI AG

6.3%

12%

1.73 x

20

St. James's Place

6.3%

11%

0.91 x

 

FTSE 100

4.9%

4%

1.79 x

Source: Digital Look, Refinitiv data, consensus analysts’ forecasts

“The yield available from those 36 stocks, and the index overall, does at least mean that investors will be compensated at least to some degree for the risk they are taking with UK equities while they patiently wait to see how the political shenanigans in Westminster and negotiations with Brussels ultimately pan out.”

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