Am I mad to suggest the FTSE 100 could hit record highs in 2020? Perhaps. But I don’t think the situation is as clear as some hyped-up newspaper headlines would have you believe.
Although it’s true many companies are facing softer market conditions, so far I’ve seen little to suggest that earnings are heading for a serious collapse. It’s also worth remembering that some of the political uncertainty that’s dogged markets this year could finally be resolved in 2020.
I can see two potential reasons why stock markets could surprise gloomy investors by hitting record highs next year.
Too cheap to ignore?
It’s easy to forget that the FTSE 100 has fallen by nearly 10% from the record high of 7,779 seen in May 2018. But since that time, corporate earnings have generally held up fairly well. The result is that the big-cap index looks quite reasonably valued, in my view.
Based on the latest FT data, the FTSE 100 currently trades on about 15 times earnings, with a dividend yield of 4.6%. By contrast, the US S&P 500 index trades on about 20 times earnings, with a much lower dividend yield.
The FTSE’s current valuation looks affordable to me, if the current level of corporate earnings is sustainable.
The market seems uncertain about the outlook for the global economy at the moment. That’s a view I share. But this uncertainty won’t last forever. If economic conditions remain stable or improve next year, I think the market is likely to respond well. This could lift the FTSE to new highs.
An end to uncertainty?
Almost every set of company results I’ve read this year has complained of uncertain market conditions. At home, there’s Brexit and the general election. Globally, markets are worried about the risk of a full-blown trade war between the US and China.
According to data provider EPFR, about $30bn has been withdrawn from UK stock market funds since the 2016 EU referendum. It’s possible that some of these withdrawals have taken place for reasons other than Brexit. But I think it’s fair to assume at least some of these outflows have been triggered by the UK’s decision to leave the EU.
The latest polls seem to suggest a Conservative majority is likely on Thursday. This is the City’s favoured option, as investors are keen to avoid Labour’s renationalisation plans. The Conservatives also have a potential Brexit on the table, even though it appears to leave many questions about future trade arrangements unanswered.
An outcome along these lines could give overseas investors the confidence to bring some money back to UK markets. All else being equal, I’d expect this to lift share prices above current levels.
I’m staying invested
I don’t have a high level of confidence in pollsters’ predictions for this week’s elections. But I suspect that, one way or another, the world will keep turning. Many FTSE 100 companies earn most of their money abroad and should be able to handle any localised problems in the UK.
Even if the stock market doesn’t hit new highs in 2020, I think money invested in the FTSE 100 at current levels is likely to deliver attractive returns for long-term investors. I intend to stay invested in shares regardless of what happens this week.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2019