2019 is shaping up to be a good year for the FTSE 100. At time of writing, the leading benchmark of blue-chip stocks trades at just over 7,500, up around 11% since the start of the year.
A total return of 15%
This is a pretty decent return, and if you add in the current yield of 4.5%, you’re looking at a total return of more than 15%. By comparison, a best buy Cash ISA pays just 1.3%, which is never going to make you rich.
This may only be the start for the FTSE 100’s resurgence, as it looks set to benefit from both the ‘Boris bounce’, in the wake of last week’s landslide, and signs that the US and China are dialling down on trade war tensions.
The index has some catching up to do, as it remains relatively cheap compared to many global markets. Investors have been scared away by all the uncertainty over both Brexit and the prospect of a radical Jeremy Corbyn-led Labour government.
UK stocks have underperformed compared to the rampant US, but also Europe and Japan, while doing only marginally better than struggling emerging markets. I reckon that next year, it will start to close the gap with the rest of the world. I’m not the only one who thinks this.
There’s lots of value out there
AJ Bell investment director Russ Mould has pointed out the FTSE 100 is barely any higher than three years ago and the pound is still way below where it was in summer 2016. “So it is relatively easy for value-seeking contrarians to make a case for a UK stock market which has underperformed, feels unloved and looks potentially undervalued on the basis of earnings and yield.”
Like me, he reckons the chance of the index hitting 8,000 by the end of 2020 are better than many suspect. Here are some top stocks that may climb if it does.
Nearly £15bn has flowed out of the UK equity market since the EU referendum in 2016, according to data from the Investment Association, and as Mould puts it, “unloved often means undervalued.” Right now, it trades on around 12.5 times consensus earnings estimates for 2020.
These things could get in the way
Now there are potential headwinds, as there always are. Prime Minister Boris Johnson is locking himself into a tight deadline for securing a trade deal with the EU, aiming to get it done by 31 December 2020. If he manages that, the FTSE 100 will get an extra lift. If not, expect trouble.
Global events will also play a part. If the US strikes a trade deal with China, markets around the world will fly, and take the FTSE 100 with them.
The US Federal Reserve might cut rates again next year, which would help, while governments and central bankers around the world are dumping austerity in favour of looser fiscal policy. There’s a lot that could go right.
The world’s longest bull run cannot go on forever, but with the global economy picking up after a lull, it could race on for another year or more. This might be a good time to top up your FTSE 100 tracker, or invest in a spread of shares, so you can feel the benefit.
Happy New Year!
Harvey Jones 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