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11 January 2019

2019: Cautious optimism as investors face the unknown

Could it be time to revisit UK markets in 2019? Investment managers and stockbrokers at Redmayne Bentley say the outlook for domestic markets is broadly positive despite – or perhaps because of - Brexit.

According to the national firm’s Annual Market Outlook Survey, the UK is the equity market set to see the most gains in 2019, with some anticipating a post-Brexit relief rally with the removal of uncertainty.

But the responses showed attitudes towards Brexit were divided as the event was also named as the greatest concern for investors for the year ahead.

Key predictions:
  • Slightly more bullish than bearish outlook for the year ahead
  • More optimism than pessimism over the UK economy next year
  • Brexit both the biggest positive and greatest worry for investors
  • Automation most favoured investment theme
  • Technology the favourite sector for 2019
  • Retail expected to be most disrupted next year
  • The UK equity market will see the most gains; Europe will see the most losses
James Rowbury, Investment Research Coordinator, said: “2018 has been a rollercoaster year for UK domestic politics, ending in a crescendo of last-minute Brexit talks, a confidence vote in Theresa May’s leadership and the mounting possibility of a no-deal exit from the EU.

“While the overriding theme of our survey rested on Brexit, a cautiously optimistic tone dominated responses, with 55% of our respondents saying that, going into the year, they were bullish for UK markets. Most harboured the view that UK equity markets now appeared oversold and undervalued; after all, the FTSE 350 index price to earnings multiple now resides at a five-year low of approximately 12x.”

Which equity market will see most gains?
UK 41%
US 21%
Emerging markets 17%
Japan 14%
Asia Pacific (ex-Japan) 4%
Europe 3%

Which equity market will see the most losses in 2019?
Europe 32%
UK 24%
Emerging markets 21%
US 18%
Japan 5%

Biggest positive for investors in 2019
Brexit 27%
Technological advancements 26%
US economic growth 21%
UK fiscal stimulus 9%
Other 17%

What do you feel is the greatest worry going into 2019 for investors?
Brexit 36%
Global trade wars 29%
Global debt burden 15%
Global monetary policy tightening 11%
Other 9%
 
James said: “When asked what the biggest positive and greatest worry was, Brexit topped both lists, with 27% and 36% respectively. Such results highlighted the binary nature of the remaining outcomes for the UK, which now seem limited to: a) Theresa May’s deal does not pass through the delayed parliamentary vote and the UK exits without a deal, b) the deal goes through and the UK exits with a ‘soft’ Brexit, or c) the Labour party triggers a vote of no confidence in the government, seizing the opportunity to appease remain voters and revoke Article 50.

“The latter of these options was a widely expressed concern across respondents, who felt a Corbyn-led government would severely limit upside potential, owing to policies around renationalisation. However, with a Labour government relatively low down in the realms of possibility, 35% of respondents cited the word ‘uncertainty’ as their biggest concern; a buzzword epitomising the difficulties facing UK business.”
 
The UK Economic Outlook for 2019

In general, how do you feel about the prospects for the UK economy?
Optimistic
 
38%
Pessimistic
 
32%
Neutral
 
30%


Expectations for Sterling/Euro (Current Level: 1.15 Nov 2018)
Above current level 41%
Below current level 41%
Remain the same 18%

Expectations for Sterling/Dollar (Current Level: 1.30 Nov 2018):
Above current level 39%
Below current level 41%
Remain the same 20%

Expectations for BoE base rate (Forecast 1.25%):
Above expectations 8%
Below expectations 38%
Meet expectations 54%

Expectations for inflation (Bank of England forecast 2.1%)
Above expectations 36%
Below expectations 24%
Meet expectations 40%

Wage growth expectations (Forecast: 2.6% CIPD)
Above expectations 20%
Below expectations 35%
Meet expectations 45%
 
James said: “Looking at the macro picture, 76% of respondents believed that inflation would meet, or exceed, Bank of England (BoE) forecasts of 2.1%, while 65% thought wage growth would be at, or above the 2.6% forecast. This is indicative of confidence in UK economic growth.
At the same time, 92% of respondents believed the BoE will maintain rates at, or above the 1.25% target in 2019.”

Our three favourite investment themes for 2019:
Automation 50%
Cyber security 38%
Renewable energy 36%

Which sector are you most optimistic about for 2019?
  1. Technology
48%
  1. Pharmaceuticals
17%
  1. Mining
11%

Which sector do you see being most disrupted in 2019?
  1. Retailers
48%
2 = Travel and leisure 8%
2 = Financial services 8%
 
“An overriding positive for returns was that of technological change, with a universal sentiment that technology would be both disruptive and the most positive force for change,” said James. “The sector topping the list of optimism in 2019 by a landslide 48%. Moreover, when asked for favourite investment themes, respondents overwhelmingly chose Automation and Cyber Security as preferred picks.”

The retail sector’s woes have been well-documented during 2018 and investment managers and stockbrokers expect its struggles to continue into next year, with the rise of online retail and a reduction in disposable income among consumers cited as among the main concerns. One respondent said the success of the tech sector could be a factor, citing it as “the Achilles for retail.”
 
How will the FTSE 100 perform in 2019?
Bullish 55%
Bearish 45%

How high will the FTSE 100 go during 2019?
<7000: 2%
7000 – 7199 11%
7200 – 7499 33%
7500 – 7749 26%
7750 – 7999 17%
>8000 11%
Average high: 7446

How low will the FTSE 100 go during 2019?
<6000 17%
6000 – 6249 24%
6250 – 6499 24%
6500 – 6749 24%
6750 – 7000 11%
Average low: 6059

Our top three FTSE 350 performers for 2019:
1. DS Smith
2. Ocado
3. AstraZeneca

James said: “DS Smith has been a solid business for some time, with the tailwind of long-term structural growth drivers such as the rise of e-commerce. The company’s latest results illustrated double-digit profit growth, while increasing shareholder pay-out by 14%. With a share price fall of over 38% year-to-date, the company now sits on a price to earnings multiple of only 9x and is generating a free cash flow yield of 6%, representing a value opportunity in the market.”

Our top performer outside the FTSE 350:
1. Fevertree
2. IQE plc
3. Scapa Group

James said: “Fevertree has shot to success since its IPO in 2014 in tandem with a shifting demographic: the rising trend of discerning gin drinkers seeking a premium companion for their mix.

“The company’s growth has been phenomenal over recent years, returning a compound annual earnings growth of 76% over five years. Fevertree has now taken over the direct management of its US operations, positioning itself to dominate the marketplace.”

While some investors will be hoping to see the cloud of Brexit-related uncertainty lift, volatility is expected to linger, at least until Parliament votes on Theresa May’s deal to leave the European Union. At the time of writing, this was scheduled to take place during the week commencing 14th January.

James said: “All in all, 2019 will be a year of unfamiliar territory for markets, which will now look to January for more conclusive guidance.”

Notes to editors
 
Please note, investments and income arising from them can fall as well as rise in value and you may lose some or all of the amount you have invested. Past performance and forecasts are not a reliable indicator of future results or performance.
 
Please note that this article is for information only and does not constitute a recommendation to buy or sell shares in the companies mentioned. Please note there is an extra risk of losing money in AIM shares.
2019: Cautious optimism as investors face the unknown

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