Brexit casts a dark cloud over our experts' predictions for 2019

Oops. The Indy’s crystal ball was obviously on the blink last year. The less said about our FTSE predictions and share tips the better. They don’t make for happy reading.

Back when I compiled The Independent’s 10 shares to follow, I once had a run of five straight years beating the market. It just goes to show why the Financial Conduct Authority insists that financial firms warn potential investors about the perils of putting too much faith in past performance. It isn’t always a guide to the future as last year’s tips prove.

Still, anyone who came out of an ugly, Brexity year on the markets smelling of roses probably got their education at Hogwarts School of Witchcraft and Wizardry. The FTSE finished it on the ropes, sharply down on 2017 at 6728.13.

Nonetheless, The Independent’s fortune tellers are bravely stepping into the breach again having taken a refresher course under Professor Trelawney (Harry Potter fans will know what I mean). We’ve also lined up a panel of worthies from the City. Our sincere thanks to all of them for being such good sports and putting their heads above the parapet.

I’ve changed the rules a bit this year: our panel was told they could vary their predictions based on possible Brexit outcomes, because, well, who could possibly make an accurate prediction for where that will end up?

But before we get down to business, the usual warning. This feature is designed to be fun. If you’re going to put actual money down, do your own research into stocks and the markets and consider taking professional advice too.

As the editor of this feature, I get to go first. That’s not something I relish looking into the fog that surrounds 2019. But here goes.

Markets are due a rally after this year’s sell off, the FTSE 100 in particular. It’s suffered from the complete lack of appetite for UK assets, something else to thank Brexit for. But it is also worth remembering that it’s dominated by international companies that make most of their money overseas. It means there is real value to be had for the savvy investor, and perhaps a lot. If some kind of Brexit deal is reached, or better still we have a referendum and stay, I’m going for a relief rally (at some point) and an end of year close of 7,200, which I admit might look optimistic. If it’s no deal, then we’re in real trouble. The markets will hate it, so maybe 6,800. Why not worse? If the pound really collapses, the UK’s foreign currency earning stocks could start to look absurdly cheap. But I’d advise heading out of the country if you have the option.

Stock pick: HSBC (646.9p). CYBG (181.2p) if Brexit is resolved

I’ve no great love for HSBC, which has had a chequered regulatory history in recent years. That said, while it has a big UK business, its most important markets are in the far east and it reports earnings in US dollars. The third quarter results were unexpectedly good and the shares have climbed since then. But it’s still offering a prospective dividend yield of 6 per cent, with no signs that the payout is under any threat. That’s right, 6 per cent. Eventually people will wake up to a number like that. With the UK in turmoil, there are good reasons for investors to look to this most international of banks. If you think Brexit will end well, and the sugar plum fairy actually exists, however, take a look at challenger bank CYBG following its acquisition of Virgin Money. That was a sweet deal and yet the business trades on just six times earnings. If this ends better than I expect, its current price could look ridiculously cheap this time next year.

Caitlin Morrison, business editor, The Independent

While global stock markets looked like they were heading in the right direction earlier this year, they’re moving into 2019 on a markedly different path. The FTSE 100 hit record highs in May off the back of the weakened pound. However, while sterling continued its decline throughout the rest of the year, it was not enough to sustain the stock market’s strength. The root of all this volatility was, of course, Brexit, and it doesn’t seem like that’s going to be cleared up any time soon.

If the UK crashes out of the EU with no deal, the pound is likely to see a crash of its own – but as we now know, that doesn’t necessarily mean a rally for the FTSE anymore. It could head back towards multi-year lows as investors scramble to distance themselves from the UK. Even if Theresa May manages to get some sort of deal through parliament, it will be some time before we know what sort of impact the new arrangement is having.

It seems foolish to make any predictions but I’m going to target a FTSE 100 close of 7,000 – which seems wildly optimistic at this point in time.

Stock pick: International Consolidated Airlines Group (618p)

IAG is the owner of British Airways, Aer Lingus and Iberia, among others. The FTSE 100 company has paid out pretty hefty dividends in recent years, and it’s relatively cheap at the moment – the share price was knocked severely by a cyber attack over the summer. Despite concerns that a potential no-deal Brexit could wreak havoc on air travel in the UK, chief executive Willie Walsh has not wavered from his positive outlook and says the company is confident that it will not be harmed by disruption to flying rights – so confident that the group announced a €2.6bn investment plan in November. With oil prices forecast to drop over the next year, fuel costs should be more manageable too.

Laith Khalaf, senior analyst, Hargreaves Lansdown

It’s not been a vintage year for global stock markets. Most are lower than where they started. However, that’s the nature of the beast: stock market returns are lumpy. The UK economy continues to limp along, though a pick up in wage growth has been encouraging. Clearly Brexit is the big swing factor when it comes to the year ahead, and until there is some resolution on that front we can expect sentiment to remain febrile.

With the FTSE 100, I’m once again going to play the averages (it only works as a strategy if you do it year in year out!) The FTSE adds about 5 per cent a year on average, excluding dividends, so from current levels that puts us somewhere near 7,050.

Stock pick: Lloyd’s Banking Group (51.85p) assuming an orderly Brexit. Diageo (2,795p) in the event of a disorderly Brexit

In an orderly Brexit outcome my stock pick would be Lloyds Banking Group. It currently has a prospective dividend yield of around 5.5 per cent. When CEO Antonio Horta Osorio took over in 2011, the bank was making a loss of £260m. Last year it made a £3.5bn profit, yet the share price is lower than when he started. The market is selling down Lloyds because, at best, it doesn’t know what the next year holds for the bank’s profitability while Brexit hangs in the balance. If the UK economy is unscathed we can expect the share price to pick up. In bad outcome, all stocks are likely to come under pressure in the short term. So is the pound. Bets can be hedged a bit by holding an internationally diversified defensive stock like Diageo. The manufacturer of Guinness and Johnny Walker gets most of its revenues from overseas. And let’s face we’ll probably all need a drink in this scenario.

Russ Mould, investment director, AJ Bell

Political shenanigans in Westminster and the ongoing negotiations with Brussels mean that offering any sort of forecast for the UK economy in 2019 is a pretty thankless task. You can see the pound going to $1 in the event of a Brexit outcome that markets don’t like and it going back to $1.50 if the negotiations are seen as finally yielding a positive result, so at $1.25 sterling is probably appropriately priced right now

When it comes to the FTSE 100 the darkest hour comes before the dawn and with pessimism so pervasive the market may have a better chance of making it to 8,000 by the end of 2019 than many suspect. It is 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 per cent below where it stood on the day of the EU referendum in June 2016. Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis. It also offers a prospective yield of 4.9 per cent, which beats base rates pretty handily and also outstrips the 1.25 per cent yield of 10-year UK government bonds.

Stock Tip: OneSavings Bank (350p)

I’m normally wary of banks but in the case of the FTSE 250 “challenger” OneSavings Bank I am prepared to make an exception. The stock trades on barely 6.5 times earnings and 1.4 times book value while offering a dividend yield of 4.1 per cent. If everything goes wrong from a political or macroeconomic perspective, the lowly valuation could provide some relative downside protection, while the yield may offer some compensation for the risks involved as investors tough it out. A Brexit deal triggering a rally in sterling, and a resurgence in interest in UK assets, will put stocks like OneSavings Bank in the vanguard of a recovery, especially as loan growth is robust. The firm’s return on equity of 26 per cent is outstanding relative to its peer group. Given the bank’s exposure to mortgages, smaller companies and its strong focus on buy-to-let there are clear risks. Any economic and house price downturn could test sentiment and profits. But the valuation is low.

Garry White, chief investment commentator, Charles Stanley

Brexit, Donald Trump’s trade war and budget tensions between Italy, France and eurozone authorities will be major drivers of markets as politics dominates the start of 2019. The future shape of the UK’s relationship with the European Union remains unclear. A chaotic Brexit is likely to result in a fall in the pound, which is positive for the FTSE 100 as the majority of its earnings are generated abroad. However, a sharp rally in sterling could be negative for the index and any gains will be capped. Hopefully Donald Trump will be pushed in the direction of getting some sort resolution with China over the trade dispute so he can declare a “win” sooner rather than later. This will be positive for markets worldwide. The biggest risk is that the US Federal Reserve oversteps the mark and slams the brakes on the US economy too hard. However, there are signs that the central bank may be more doveish than many expected My FTSE 100 prediction: 7,100

Stock tip: NMC Health (2,736p)

Growth at this Middle Eastern private healthcare network operator is supported by a strong economy in the United Arab Emirates (UAE) and the rollout of mandatory health insurance in the country. It also benefits from the UAE’s limited corporation tax regime and is expanding into Qatar and Saudi Arabia. Its new joint venture in Saudi Arabia, which will see it become one of the largest healthcare operators in the kingdom, is due to complete in the first quarter of 2019.

Andy Brown, head of direct equities, Tilney Asset Management

Looking into next year, in the near term sentiment towards UK shares will depend in large part on what happens between now and the end of March when the UK is set to leave the EU. Many of the big UK political risks appear to be playing out now in the form of a potentially messy Brexit and with doubts about the sustainability of the current UK government. These anxieties are reflected in current UK equity valuations, which at 11 times earnings, are well below other developed markets and their longer-term trend.

It’s important not to confuse UK equities and the domestic economy. In fact well over two-thirds of the earnings of FTSE 100 companies in aggregate are made outside of the UK. Currency volatility is likely to remain a feature which will have both an operational and financial impact of many UK companies. Not only are UK equities at discounted valuations, dividends remain an attractive feature of the UK market both compared with other regions and bond yields. We expect the FTSE 100 to eke out small gains by the end of 2019, perhaps finishing at around 7350, but with dividends on top.

Stock Pick: DS Smith (299.3p)

DS Smith is a leading supplier of packaging products with a genuine global presence. Increasingly its customer base are rationalising their own supply chains which plays nicely to its scale and innovative record. Ecommerce is a strong, global demand driver. Sustainable packaging and increased environmental awareness is another area where the group is strong. Management have proven adept at combing consistent organic growth with targeted acquisitions. The group has a strong financial record with double-digit 10-year revenue, profit and cashflow growth. Based on consensus forecasts, which have held up well, it offers a prospective 5.3 per cent dividend yield.

Fiona Cincotta, senior market analyst, Cityindex

Extreme market turbulence towards the end of 2018 shows investors are repositioning for the year ahead. 2018 certainty made up for the lack of volatility in 2017 and 2019 could top that yet. We are not short of key themes to ensure a bumpy ride across the year; Trade wars, China slowdown, US Federal Reserve tightening (or not), Brexit and Italy all point to 2018’s volatility continuing if not rising in the year to come.

The already challenging task of crystal-ball-gazing is almost impossible heading into 2019. With so much uncertainty surrounding Brexit and just three months to go to the break, perhaps the only certainty for the pound and the FTSE 100 is the continuation of this new uncertain phase.

The year just gone has been a nightmare for the FTSE, which is down around 11 per cent this year, despite a 5 per cent drop in sterling. Weakness in the pound is good news for all the international stocks on the FTSE, around 70 per cent of the index itself. However, we expect broader fears of slowing global growth to ramp up across 2019, starting as soon as January with a softer US earnings season.

Predictions for the FTSE would need to be split depending on the type of Brexit Theresa May secures. A disorderly, no-deal Brexit could see the pound plummet which would offer more support to the FTSE, as we saw post the Brexit referendum. However, a key difference is that the global economy was in better position in 2016. Under this scenario we envisage a very volatile year with the FTSE ending only marginally higher.

A Brexit deal will see the pound recover some ground, adding pressure to the FTSE. A stronger pound, plus growing concerns over global growth would mean a difficult year for the FTSE which could close lower.

So, no-deal Brexit: 7,200. Brexit Deal: 6,500

Stock pick: Randgold Resources (6.546p)

Making money on stocks in 2019 amid such uncertainty will require careful choices. Gold has not lifted off this year, shedding 5 per cent of its value as a strong US economy and the Federal Reserve hiking rates have boosted faith in the dollar. However, with the Fed expected to slow its rate of interest rate rises this year the glitter could return to gold. With the precious metal expected to increase between 5 per cent and 15 per cent miner Randgold Resources will be a stock to watch.

Chris Beauchamp, chief analyst, IG

It has been a volatile year, although much of this comes off the back of 2017, one of quietest on record. The “synchronised global growth” idea disappeared fairly early on, and trade wars have certainly not helped matters. The great post-2008 bull market has not come to an end, but it has taken quite a kicking. Things will remain volatile, but some of the bearishness and pessimism is perhaps overdone.

If Brexit ends with a deal/Remain, then the FTSE 100 could hit 7,500, but if no deal 6,000.

Stock Pick: Prudential (1,402p)

The life insurer has good exposure to Asia, a strong dividend, and is reasonably valued. I think this works in both situations.

Stephen Adams, head of equities, Kames Capital

Disorderly Brexit risk, Corbyn risk, earnings risk, monetary policy risk: it is little wonder then that the FTSE 100 is down. Nor is it clear that any of these pressures are abating as we head into the start of 2019. However, on a 12-month view it is possible to see the catalysts for a higher UK equity market.

UK equities are the contrarian global asset class, and any clarity on Brexit short of a no-deal cliff edge would likely be taken well. It is also possible that the economy would enjoy a relief bounce with the release of some pent up demand and a looser fiscal stance. In that scenario I would envisage the FTSE at 7,450 by year end 2019.

By mid-year we may also witness a pause in US monetary tightening and a stabilisation in rebased earnings per share forecasts. Even with a no-deal Brexit I could see a FTSE little changed over the year as sterling takes the strain and the high percentage of overseas earnings in the blue chip index receive a boost on any devaluation, so 6,800.

Stock pick: No Deal, Aveva (2,420p). Deal, Balfour Beatty (249.3p)

The deal with Schneider materially enhanced the sales opportunities for Aveva’s world class portfolio of design, engineering, construction and industrial software solutions. Recent updates have proved reassuring and with a significant proportion of the company’s earnings in foreign currency, Aveva would receive translational benefits on any sterling weakness.

Balfour Beatty, meanwhile, has undergone a painstaking and protracted period of dealing with underperforming contracts and has emerged with a strong balance sheet, rising margins and resilient cash flows unlike some competitors. As a contractor with a number of UK government contracts the stock should bounce on a Brexit deal and the valuation should see an upward re-rating.