FTSE 100: Brexit’s impact on stocks in 2019

2018 has been a bruising year for the FTSE 100. Brexit, global sell-offs and trade wars have all taken their toll.

So far, the index has shed around 8% in value this year to sit just north of 7,060; compare this to the S&P 500 which has gained 12%. November piled on the pressure as the FTSE 100 notched up its second-straight monthly loss.

Impact of Brexit on the FTSE 100

Unsurprisingly, Brexit has cast a long shadow over the UK market. The British government has acknowledged that any option for leaving the EU will be worse for the economy than staying in. Bank of England Governor Mark Carney also underlined the threats of a ‘disorderly’ exit from the EU, which risks depressing growth until the 2030s.

UK-focused banks who depend on the domestic housing market (mortgages) and consumer spending (credit cards) are particularly exposed to any slowdown. Barclays (BARC.L), Lloyds (LLOY.L) and RBS (RBS.L) have all seen their share prices slump this year over Brexit concerns.

End of quantitative easing in Europe 

Staying in Europe, the European Central Bank plans to end its quantitative easing programme at the end of the month. Despite eurozone growth slowing to 0.2% in Q3, down from 0.4% at the start of the year, ECB president Mario Draghi has insisted the central bank will press ahead. 

A move away from QE could see the ECB raise interest rates, something that could affect investor confidence. In March, speculation over the BoE’s plans to hike interest rates caused the FTSE 100 to drop to a 15-month low. However, Draghi has hinted that there won’t be any rise until at least summer 2019.

One to watch: Vodafone

Despite the gloomy outlook, the FTSE 100 remains home to the dividend. Vodafone [VOD.L] rewarded shareholders with a meaty 8.6% dividend in its recent earnings announcement, even with a $7.8bn loss.

“With the yield currently in excess of 8% and the shares relatively low we take the view that [Vodafone shares] are attractively priced for income-seeking investors taking a contrarian approach and looking for a low to medium level of risk,” said Ian Forrest, investment research analyst at The Share Centre.

However, the stock’s trailing profit-to-earnings ratio is expected to grow 20.3x over the next 12 months, so it will need to perform strongly if earnings are to grow.

Vodafone share price performance, NASDAQ interactive chart, as at 7 December 2018

Fast faller: Barratt Developments

On the losing side, investor concerns that a ‘no deal’ Brexit will trigger a recession have hit the nation’s homebuilders. Barratt Developments [LON: BDEV] has seen its share price crushed 30% since the start of 2018. A slowdown in new home sales is weighing on shares, with rates falling from 0.75 reservations per outlet per week to 0.72 during the first 15 months of the year.

With the stock trading near year lows, investors could, however, be eyeing up a bargain. The homebuilder has solid financials and a low PE of 7.2, dropping to a forward PE of 6.86. Also helping things is UK chancellor Phillip Hammond’s decision to extend Help to Buy to 2023.

Where does the FTSE 100 go in 2019?

In a recent Reuters poll, the median industry prediction was that the FTSE 100 will close 2019 at 7,500. This muted forecast represents a worsening of sentiment – the previous poll, taken in the summer, predicted a close of 7,900. 

But there is hope according to Chris Bailey, European strategist at Raymond James: “Anything which gives a semblance of hope and faith that the Brexit angst and uncertainty may be worked through is going to provide some scope for these moves to be reversed –  and much more.”

Much then will depend on the news flow around Brexit. With the possibility of the US economy slowing to below 2% in 2019, and the UK market cheaper than eurozone stocks on a forward PE basis, the FTSE 100’s current levels could represent an opportunity if the market bounces back next year.