I don’t want to shock you, but I believe the FTSE 100 could surge to 8,500 in 2019. This might seem like I’m being over dramatic at first glance. But all I’m doing is extrapolating past trends, trends that I believe could play out once again this year no matter what happens between the UK and the European Union.
Divorce shocker
The biggest risk UK investors face in 2019 is undoubtedly a messy Brexit. A no-deal scenario, or one that leads to a significant deterioration in economic activity, will almost certainly result in market losses.
The upside is that a messy divorce will also lead to a drop in the value of the pound, which is going to be good news for the FTSE 100. Because more than two-thirds of the index’s profit is produced in countries outside the UK, a weaker pound is positive for earnings growth as it pushes profits, when converted back into sterling, higher.
This is why the FTSE 100 jumped more than 600 points in the days immediately after the referendum result was published. Further sterling weakness could add several hundred points to the FTSE 100, putting the index on track to takeout its previous all-time high of just under 7,900.
Deal agreed
If a Brexit deal is approved, then I’m just as optimistic about the outlook for the UK’s leading blue-chip index. While a deal will likely see sterling trading higher, having the opposite effect on share prices to the one described above, this factor should be more than offset by the return of international investors to UK stocks.
There’s been a steady outflow of capital from the UK since the Brexit vote, which has weighed heavily on stock prices. I believe a deal will reverse the trend and capital will flow back into UK stocks. In this scenario, it’s difficult to see the FTSE 100 treading water for much longer.
Last year, the Financial Times reported investors had withdrawn more than $20bn from UK-focused equity funds since the EU referendum in 2016. I reckon a large chunk of this money will flood back into the country if a deal is agreed, sending Uk equity prices, and the FTSE 100, surging.
Positive outcomes
So, whichever way you look at it, it seems the FTSE 100 will head higher in 2019. But why is 8,000 my target?
As noted above, I think the index could rise several hundred points in the event of a no-deal, based on how the index acted after the referendum result. In the opposite scenario, if international investors return to the UK, I think the index could hit around 8,500, a target based on the FTSE 100’s dividend potential.
As my Foolish colleague Harvey Jones recently noted, next year analysts expect UK blue-chip dividends to hit a record high of £93.7bn. That equates to a dividend yield of around 4.9%, the highest of any major stock index in the world. I expect international income investors to flock to the UK when Brexit uncertainty is lifted for this reason. Buying could drive the yield down to 3.8%, implying a price of 8,500.
With that being the case, I think it might be worth buying the FTSE 100 for your portfolio today.
