The FTSE 100 has a good chance of reaching 8,000 by the end of next year, according to AJ Bell, following several years of underperforming its international peers. 
Over 2019 so far, the blue-chip index has posted a total return of 17.71 per cent compared with a 23.80 per cent gain from the MSCI World.
And this is not the only year that the FTSE 100 has lagged.
Uncertainty over Brexit and the political divisions that this caused means the index has made just 22.46 per cent over the past three years. The MSCI World has advanced 34.09 per cent over the same period.
There are other indicators of just how unloved the UK has been. For several years, the country has been the most-underweighted region for the asset allocators covered by the closely watched Bank of America Merrill Lynch Global Fund Manger Survey while funds in the IA U K All Companies sector have had to contend with persistent outflows since the Brexit referendum in 2016.
Performance of indices during 2019 to date
Source: FE Analytics
However, the outlook on the country has changed markedly since the Conservatives won a convincing majority in December’s general election, with the promise to ‘get Brexit done’ and many expect investors to return to the UK stock market because of this.
In its outlook for the year ahead, investment platform AJ Bell said the FTSE 100 could reach 8,000 by the end of 2020 if worries about Brexit, global trade tensions and economic growth ease as expected.
Russ Mould, investment director at AJ Bell, said: “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 (judging by fund flow data) and looks potentially undervalued on the basis of earnings and yield.
“As such, the FTSE 100 may have a better chance of making it to 8,000 by the end of 2020 than many suspect.
“Granted, the issue of Brexit must still be resolved and doubts continue to hover over the health of the global economy. However, were the UK to strike a trade deal with the EU, Washington and Beijing to settle their differences once and for all and governments around the world abandon austerity and launch looser fiscal policies then the world could look very different.”
Against this backdrop, Mould highlighted just how cheap the UK market looks – noting that the FTSE 100 is trading on around 12.5x consensus earnings estimates for 2020. Meanwhile, 20 FTSE 100 firms trade on a price/earnings ratio of 10x or less for 2020.
Source: AJ Bell, Digital Look, Refinitiv data, consensus analysts’ forecasts
“Even if some of the earnings forecasts upon which those multiples are based prove optimistic, it is still possible to argue that you can buy good quality UK-listed firms cheaply, especially if you are an overseas investor, with sterling still relatively depressed,” he added.
In addition, Mould argued that the UK could look attractive on a yield basis, given the FTSE 100 offers a prospective yield of 4.7 per cent based on aggregate consensus analysts’ forecasts for 2019. There are 33 firms within the FTSE 100 that are yielding more than 5 per cent at present.
Source: AJ Bell, Digital Look, Refinitiv data, consensus analysts’ forecasts
“The yield available from those 33 stocks, and the index overall, does at least mean that investors will be compensated at least to some degree for the risk they are taking with UK equities while they patiently wait to see how the negotiations with Brussels ultimately pan out,” he said.
Mould also highlighted four stocks that invest might want to look into further: one each for cautious, balanced, adventurous and income investors.
Cautious – Severn Trent (SVT)
“The good news for Severn Trent started in January when the water utility gained fast track approval from the regulator Ofwat for its capital investment and pricing plans for the 2020-2025 period. This meant that the FTSE 100 firm could begin to prepare its financing and analysts and shareholders could calculate forecasts for profits, cash flow and above all dividends with greater certainty. A dividend yield of some 4.5 per cent, based on consensus forecasts for the year to March 2021, should therefore prove pretty reliable, even if earnings momentum will be far from exciting, and allow Severn Trent to provide some welcome portfolio ballast.”
Balanced – TI Fluid Systems (TIFS)
“Shares in the automotive components and systems maker are starting to motor, but they still trade below 2017’s 255p IPO price and look decent value, on a forward price earnings multiple of barely 10 times and a with a yield of around 3 per cent. The lowly rating is the result of fears over a slowdown in the global car market, the perceived threat posed by electric vehicles (EVs) to its expertise in fuel tank systems and its private equity background. But TI Fluid Systems could well be a winner as and when electric vehicles gain proper traction, as EVs actually require additional fluid to manage heat. In addition, the company’s new pressurised plastic fuel tank is ideally suited to the increased fuel vapour requirements of hybrid vehicles.”
Adventurous – IP Group (IPO)
“There is a fair chance that the well-documented travails of Neil Woodford will put many investors off investing in early-stage companies for life but for brave, patient contrarians, this represents a potential opportunity. IP Group invests in, and works to commercialise, the intellectual property (IP) developed by British universities.
“Its shares have steadily fallen from 250p over the last five years, hampered in part by Woodford’s hurried disposal of a 13 per cent stake in the FTSE 250 firm this autumn. That leaves the shares trading well below their last stated net asset value figure of 110.6p a share. Such a discount provides some downside protection if some of IP Group’s investments go wrong and upside potential if they unearth a future winner or two, although the absence of a dividend and the risky nature of investing in young companies mean that IP Group is not suitable for widows or orphans.”
Income seekers - Imperial Brands (IMB)
“Normally, any company that comes with a dividend yield of 12 per cent carries a big risk warning, especially when the forward price/earnings ratio is barely 6, as such figures can usually be filed in the ‘too good to be true’ category. Throw in the ethical issues that come with smoking, a mild profit warning and autumn’s decision to part company with its chief executive and there are plenty of reasons to give Imperial Brands a wide berth.
“But the valuation prices in a lot of the bad news and ignores how tobacco remains a highly profitable and cash generative business. Imperial’s cash flow still nicely covers the forecast £1.8bn annual dividend payment, even after capital investment, tax, interest and pension contributions. Price increases help to compensate for falling stick volumes and the sale of the cigar business will further bolster the balance sheet.
“This will feel like a very, very uncomfortable stock to hold – but they are often the best investments. After a calamitous 2019 it will not take much by way of upside surprises to change perception of the stock and the fat yield means that investors are being paid to wait.”