Where next for equity markets?

This article is part of
Guide to the outlook for 2019

Closer to home

The UK has certainly not escaped the volatility in recent months and 2019 is unlikely to be any different.

At the time of writing, most investors believed that a deal between the UK and the EU27 on the UK’s departure from the European Union was still possible, despite the chaos that played out in the UK political scene in mid-December.

However, many envisaged that an extension to the March 2019 deadline would be necessary.

“An extension of the Article 50 negotiation may prove necessary and there remain risks of a disorderly Brexit,” notes Goldman Sachs’ senior European economist, Andrew Benito. 

If the UK does manage to secure a Brexit deal, UK-focused companies would benefit significantly, according to Schroders’ UK equities fund manager Sue Noffke.

“There would likely be an upwards movement in sterling and a re-rating of the market,” she explains, noting that UK-focused banks, property firms, housebuilders, FMCG companies, retailers, media agencies and utilities are all currently trading on “depressed” ratings.

“This would be particularly beneficial to those UK domestic companies that have suffered a severe de-rating over the last two and a half years,” she says.

Income hunting

British companies could also provide a good starting point for dividend income, according to Ms Noffke, who explains that the current dividend yield of the UK stock market, at 4.5 per cent, is close to that seen immediately before and after the global financial crisis.

“The short-term outlook for underlying UK dividend growth has improved, due to the strengthened payout ratios resulting from rising commodity and oil producer profits,” she adds. 

“Meanwhile, that other big driver of UK dividends, the banking sector, is finally returning to form, 10 years after the global financial crisis.”

Looking at equity income from a global perspective, investors are tipping utilities, telecoms and healthcare to be among the sectors offering improving dividends in the year ahead.

Legg Mason owned Martin Currie has earmarked healthcare as a sector likely to witness “solid dividend growth” in 2019, particularly in the US, although the company’s head of income, Mark Whitehead, warned that the emergence of a Democrat as the next US president would have negative implications for the sector.

“In 2019, we will be looking for pipeline delivery and on-market drug sales momentum, as well as continuing strong cash flow generation,” he says.

“We will, however, be keeping a close eye on who emerges as the likeliest Democrat presidential candidate. A healthcare reformist in the White House along with a Democrat Senate and House would be likely to have negative ramifications for the sector.”

Joe McGrath is a freelance financial journalist