Nearly year-end - and the market's still in limbo

The possibility of the nationalisation of utilities like broadband has seen yields soaring while share prices have fallen

AS we hurtle towards the end of the year and another UK general election, it remains hard to predict the market's direction. It's been a volatile year, with sharp movements and a great deal of uncertainty.

Over the course of the year to date the FTSE 100 has risen by 8.9 per cent - a huge relief after the dismal performance seen in 2018. But this compares poorly on an international basis: the S&P 500 is up just over 24 per cent and the European markets are up a similar 22 per cent.

So it's perhaps not surprising that we have seen such a marked degree of under-performance on a geographic basis: the level of political uncertainty is at an unprecedented level and has spilled over to UK plc where we have seen falling investment by companies.

Within the UK market there has also been a dramatic difference between indices in terms of company size. The FTSE 100, as noted above, has risen by 8.9 per cent, whereas the FTSE 250 is up by just over 17 per cent and the FTSE Small-cap index is up by 7.4 per cent, all from the beginning of the year.

There have been several factors in play - the threat of nationalisation, the impact of the pound on overseas earners, the more recent Woodford debacle and its impact on very small company share prices, to name but a few.

The possibility of nationalisation has now been set out in the Labour manifesto and covers energy, water, trains, mail and broadband. The impact on relevant company share prices has been building for some time, but the possibility now seems to be more imminent. Yields have soared as share prices have fallen.

The announcement on broadband, in particular, took the market by surprise and the yield of BT is currently standing at 8 per cent. There is a stark contrast between the yield on equities and the cost of government borrowing. The FTSE 100 currently has a 4.5 per cent dividend yield which compares with a ten-year gilt yield of 0.7 per cent. The collapse in the cost of government borrowing since the mid1990s has been dramatic, whereas the equity market yield has barely moved.

Sterling has borne the brunt of political uncertainty engendered by Brexit. Volatility has been pronounced and this has had an impact on shares such as the miners, oil majors, BATs, CRH and other companies that have a significant proportion of their earnings in US dollars.

The impact of the collapse of Woodford Investment Management has also been significant in terms of share prices of some of the smaller companies, the fear of illiquidity was brought forcibly to the market's attention when investors sold the flagship equity income fund.

In order to pay these former investors, the fund manager was forced to sell the more liquid stocks, resulting in an increasing imbalance in the remaining fund.

The obvious question is where we go from here? But it is impossible to answer this with any degree of certainty. One thing is assured: the run up to the end of the year will be extremely interesting as the political and therefore economic future remains in the balance.

:: Cathy Dixon is a partner at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.

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