By Helen Reid and Josephine Mason
LONDON (Reuters) – Britain’s FTSE 100 will only manage modest gains in the second half of the year as the nation’s tortuous exit from the European Union hangs over the market, deterring investors from scooping up attractively cheap shares, a Reuters poll found.
The top stock index will reach 7,499 points by the end of 2019, rising just 3% from current levels, according to the median forecast from a survey of nearly 30 fund managers and analysts taken in the past two weeks.
That would see the FTSE 100 gain 11.5% in total over 2019, higher than predicted in the previous survey, carried out at the end of February during a global stock market rally. That would be the index’s best annual performance since 2016.
But a new flare-up in the U.S.-China trade war early this month has dashed investors’ hopes of a sustained rebound in markets after a surprisingly strong first quarter.
At the end of last week, the FTSE 100 was up more than 8% since the start of the year, while Europe’s STOXX 600 was up about 11%.
A breakdown in trade talks and higher tariffs imposed by the U.S. on some Chinese imports have thrust fears of a global economic slowdown back into the spotlight.
For Britain specifically, a further delay of the Brexit date to Oct. 31 and domestic political turmoil have cast clouds over the country’s economic prospects.
Poll respondents see the FTSE 100 losing steam after this year, estimating the index would reach 7,712 points by mid-2020 and 7,735 points by the end of 2020.
If they’re right, 2020 will be a much slower year with the FTSE 100 advancing just 3% as the British economy digests the divorce – if there are no further delays.
“Another postponement of Brexit would likely hurt UK growth and shares,” said Ireneus Stanislawek, equity strategist at Vontobel Asset Management. “The quicker Brexit is resolved the better.”
Respondents gave fewer 2020 forecasts for the FTSE 100, reflecting deepening uncertainty over the direction the UK market will take.
Investors predicted the STOXX 600 would outperform the FTSE 100 this year, rising to 380 points and sealing a 13.1% gain for 2019.
(For graphic on FTSE predictions, click https://tmsnrt.rs/2IaG5dI)
BREXITSTILL A HIGH-STAKESGAMBLE
Investors have continued to steer clear of UK stocks as Britain narrowly avoided a no-deal Brexit in March and Prime Minister Theresa May ultimately resigned over a failure to create consensus within parliament on a deal with the EU.
The Reuters poll was conducted largely before May announced her resignation.
“Appetite for the UK is unlikely to reverse anytime soon as the Conservative leadership battle could lead to a harder Brexit stance, but the probability of a ‘no deal’ has not necessarily increased in our view given unchanged Parliament arithmetic,” said Barclays head of European equity strategy Emmanuel Cau.
Investors repeatedly point out the UK is home to multinationals with resilient earnings, trading at depressed prices because of the Brexit debacle.
The FTSE 100 trades on lower valuations than its European counterpart, at 12.3 times forward 12-month earnings against the STOXX 600’s 13.6 times forward 12-month earnings.
The overall market is also cheap compared with world stocks. The FTSE All-Share index was trading at a near 20% discount to the MSCI World in December – its biggest discount since 2009 – and was last at an 18.4% discount.
(For graphic on FTSE discount May 29, click https://tmsnrt.rs/2I6tl7Z)
“The value likely won’t be unlocked until there is some progress on the Brexit negotiations, but that should be a catalyst for international allocators to start putting money back to work which would benefit these stocks enormously,” said Rory McPherson, investment director at Psigma Investment Management.
Though valuation is cited as a draw by many, investors are still shunning the region, with a net 28 percent of fund managers underweight UK equities according to Bank of America Merrill Lynch’s May fund manager survey.
(Reporting by Helen Reid, Josephine Mason, Danilo Masoni and Thyagaraju Adinarayan; additional polling by Indradip Ghosh, Mumal Rathore and Sumanto Mondal in Bengaluru; Editing by Hugh Lawson)