Brexit looms over everything as our City gurus gaze into their crystal balls

The FTSE 100’s performance is inversely aligned to that of the pound and how our experts feel about the Brexit talks guides their views on economics and markets in 2018

Brexit is the joker in the pack that makes life difficult for our forecasters (Getty)

Predicting anything with any accuracy in the current climate leaves you on a hiding to nothing, but just like last year, The Independent is going to have a crack at it.

I’ve also secured a panel of worthies from various parts of the City to put their necks on the line alongside mine.

I’m pleased to report that last year I called inflation leading to a rise in interest rates correctly. I was also proved right that a sluggish economy would make the Office for Budgetary Responsibility’s then forecasts look overly optimistic (they’ve since come down).

My FTSE 100 prediction last year, at 7,100, made me the second most pessimistic contributor on the panel, whose forecasts ranged from a bearish 6,750 to a bullish 7,750. Given the difficulty anyone faces in making an end-of-year forecast for the index, it could have been worse. However, my stock tip, Balfour Beatty, could have been a lot better. It looked like a winner at the beginning of May before giving a big chunk of its gains back, although it has rallied of late.

Among last year’s panel’s tips were Paddy Power Betfair, which like Balfour has ended the year rather flat. And Kier, RPC, and Auto Trader all lost quite a bit of ground.

The lone star in the sky was provided by Chris Beauchamp, from spread betting company IG. And it was quite a star: Chris picked Persimmon, the share price of which has headed off into space and beyond. He is therefore The Independent’s stock picking champion of the last year, and the best of it is that he’s back, along with most of the others, for what I hope will be a repeat performance this year.

Our thanks to all of those brave enough to poke their heads above the parapet.

An added bonus is the addition this year of The Independent’s business editor, Josie Cox. I confess a certain amount of self-interest in calling upon her services. It doubles the chance of the home team calling something correctly!

A word of warning before we dive in: this piece is designed to be fun. You should always carefully weigh up your personal circumstances before making any investments, and consider whether it is appropriate to take professional advice.

As this feature’s editor, as ever, I get to go first.

James Moore, chief business commentator, The Independent

FTSE 100 forecast: 7,800

​The slow-motion car crash of Brexit will loom ever larger as the year progresses. The pound finished the year strongly after what was dubbed a breakthrough in negotiations with the EU, but with March 2019 slated as the date of Britain’s departure, and the ridiculously tight timescale the Government has insisted on operating under, expect there to be bumps in the road that will see Britain’s currency swinging wildly.

Sadly, the country is cursed by a shabby crew of selfish, self-interested and second-rate Brexiteers. They might have backed Theresa May’s divorce bill offer that has facilitated the talks moving on, but they like nothing better than throwing hissy fits which could upend the process before we’re done, taking the economy with it.

Even if all goes well, growth is set to be sluggish, and with the consumer feeling the pinch, I wouldn’t expect another interest rate rise, although, with the year’s final set of inflation figures coming in higher than expected, I may yet be proved wrong about that.

We live in nervous, if not downright scary times, and geopolitical instability, stoked by the man in the White House, will keep stock markets from getting overexcited. There may be a correction at some point in the year, but my FTSE forecast still comes in at 7,800 because when the pound falls, the FTSE rises by dint of the latter’s high proportion of overseas earnings.

Stocks have shrugged off a lot of instability this year. That resilience, and the fact that I fear Brexit will hand the pound a kicking, means that investors in UK listed shares could do OK in 2018.

Stock Tip: Micro Focus

I want some of those overseas earnings for my stock tip. Micro Focus offers them. The software outfit, Britain’s biggest quoted tech company, pulled off a big merger this year, gobbling up Hewlett Packard Enterprise’s software business. More deals may follow, which may threaten the share price, but the company has proved to be very effective at wringing value out of mature businesses and I’d expect that to continue. I continue to decry the share option package bosses have been handed, an example of everything that is wrong with the way executives are rewarded in this country. That said, in an uncertain world, I’d rate Micro Focus as a decent bet, even if it doesn’t look all that cheap on valuation grounds. It is underpinned by a decent dividend yield too.

Josie Cox, business editor, The Independent

FTSE 100 forecast: 7,600

​In 2018 the UK economy will continue to be buffeted fiercely by the forces of Brexit, while the stock market will very much be at the mercy of the pound.

The last few months of 2017 have taught us that morsels of progress around Brexit talks are often enough to propel the currency to multi-week highs against the dollar and the euro. Likewise, a setback has the power to send sterling sliding. Because of the FTSE 100’s international exposure, it tends to move inversely to the pound. That won’t change in 2018.

Call it wishful thinking, but I do think there’s still a realistic chance that the UK and the EU manage to hammer out some form of trade deal in the next few months – there’s just too much at stake! So as a result of that, there’s a possibility we witness a slow and steady appreciation in sterling, which in turn would put a cap on the FTSE 100’s gains. We’re unlikely to get back to pre-Brexit levels just yet, but – without wanting to jinx anything – I think the worst could well be over for the pummelled pound for now.

Elsewhere, the prospect of a sustained a cap on oil production by Opec member and non-member states is likely to support crude prices, which would lend a crutch to the FTSE 100. And the odd acquisition of a UK company by an overseas buyer should keep valuations healthy. Whatever happens, get set for a wild ride. Volatility will continue to be the order of the day. If the last 24 months have taught us anything, it’s to expect the unexpected. That’s the new normal. So if in 12 months’ time I’m proven completely wrong, I truthfully wouldn’t be all that surprised.

Underlying corporate health, a steady oil price and some M&A should be able to get the FTSE to 7,600.

Stock tip: Just Eat

A big theme of 2017 has been the emergence of the on-demand service economy – cars, food, electronics and other goods and services immediately available at the click of a mouse. A major beneficiary of that has been Just Eat. The takeaway website earlier this year overtook Sainsbury’s in terms of market value. Its savvy business strategy and finger-on-the-pulse approach to customer demands has paid off. In October it nudged up its full-year revenue forecast for the second time in just four months, after reporting a 47 per cent increase. There could well still be some upside.

Chris Beauchamp, chief market analyst, IG

FTSE 100 forecast: 8,000

​The stock market rally went on throughout the year, especially in the US, where new record highs became an almost daily occurrence during the final few weeks of 2017. Predictions of a bubble abounded, although the emergence of bitcoin as a mainstream phenomenon meant that stocks looked almost pedestrian. As we head into the new year, the question is whether this bull market is ripe for a fall. Given it has shaken off the chaos of the Trump administration, elections throughout Europe, separatist movements in Catalonia and nuclear tests by Kim Jong-Un, it is going to take something fairly hefty to cause a sell-off. Relative to bonds, equities remain cheap, and it is this that suggests that 2018 will see further gains in global stock markets.

For the FTSE 100, the strength of the pound was a major headache. While the US kept on pushing to new highs, the FTSE’s attempt to reach a new record was frequently stymied by a bounce in sterling. If Brexit talks regarding a trade deal start to go better, then the pound may keep on rising, which will not be good news for those international stocks in the premier index. Thus, while the broader market may continue to rally, the FTSE’s underperformance will continue. Nonetheless, I suspect 8,000 is still a good target, representing a gain of just over 9 per cent.

Stock tip: Legal & General

At this point in the market, chasing expensive stocks may not be the best idea. One to keep watching, however, is insurer Legal & General, which currently trades at just ten times earnings, and only just over twice its book value. With a yield of 5.5 per cent thrown in as well, it looks to have a good combination of income and valuation, and with a good balance sheet the attractions mount up.

Stephen Adams, head of equities, Kames Capital

FTSE 100 forecast: 7,850

​Against a backdrop of synchronised global growth, the fundamentals remain supportive for the UK equity market. The global economy continues to enjoy good health; industrial commodities have strengthened and oil, which had been weak, has recovered. The credit market is relaxed, with spreads continuing to trend lower. While politics will continue to cause volatility as sentiment ebbs and flows on issues such as Brexit and US tax reform, the economic backdrop for the equity market appears constructive looking forward to 2018. Profit margins are at highs, and the elevated equity risk premium and low absolute level of bond yields continue to offer valuation support for equities. The picture remains solid for corporate earnings, with forecast UK earnings growth for the FTSE All Share to December 2018 of 7 per cent and M&A activity is likely to provide further upside.

Stock tip: Synthomer

Synthomer, the speciality chemical maker, has a highly regarded management team, which is developing the valuable knack of under-promising and over-delivering judging by recent results and updates. The company’s valuation is attractive on a forward price/earnings multiple of less than 15 times. The shares have paused for breath as the market anticipates the possibility of further earnings accretive deals. With a healthy balance sheet and great opportunities for rationalisation within the chemicals industry, 2018 is a year of exciting potential for Synthomer.

Andy Brown, head of direct equities, Tilney Investment Management

FTSE 100 forecast: 7,200

​As we stare into next year, it is important to understand what has been happening of late. There have been some disappointing corporate updates recently from a broad range of large UK companies, economic data has been patchy and forecasts are downbeat. Alongside this is the ongoing challenge of Brexit negotiations and concerns around UK domestic politics, with the potential for increased state interference now very much back on the agenda. We have been surprised how often the discussion around a possible hard-left Labour government has come up at company meetings. That the FTSE 100 has been trading a tight range this year is very much testament to its breadth and diversity. So in many respects the key question is whether the challenges from recent months get resolved.

While the process of Brexit will continue throughout 2018, we are due some positive news from it! Inflation is very much back in focus and this is usually good for equities although with sluggish wage growth there remains a significant headwind for consumer related sectors. Sterling volatility has helped exporters and made UK assets more attractive to overseas buyers. The land grab of digital over traditional businesses will continue apace and should provide isolated pockets of good news. There will no doubt be enthusiasm around the royal wedding and perhaps misplaced optimism around the summer’s Fifa World Cup, until reality returns things to normal.

So a very boring range bound market seems the best bet. I see a lower end to the year as the reality of Brexit will be staring at investors hard in December 2018, hence my forecast of a 7,200 level at year end. But don’t forget that the whatever happens to the level of the FTSE 100, UK dividends remain high compared to other developed markets.

Stock tip: Ferguson

Considering my market view, I’ve focused on a business with high overseas earnings for my stock pick. US construction spend continues to move ahead at a steady pace and has yet to see any additional boost from the Trump administration’s pledge to ramp up infrastructure investment. Ferguson PLC, a specialist distributor of plumbing and heating products, generates 90 per cent of its core operating profit from the US, putting it in a very strong position. Its UK operations now only represent 7 per cent of group profit but early indications from its transformation plan are positive. It recently raised €1bn from the disposal of Stark, its Nordic business, another positive step in simplifying the business. The group has positive free cash flow characteristics and is forecast to have eliminated net debt by the end of full year 2019. It offers a free cash yield of 5 per cent while trading at a 20 per cent discount to its US peers.

Laith Khalaf, senior analyst, Hargreaves Lansdown

FTSE 100 forecast: 7,750

​Economically speaking, the UK is at a bit of a crossroads and whether we take the high road or the low road will depend substantially on the outcome of the Brexit negotiations. However, looking across to the stock market, quite a lot of economic pessimism is baked into the share prices of domestic UK companies, and any positive surprises in the Brexit negotiations could result in an upward re-rating for some of them. That said, a good Brexit is probably a mixed blessing for investors in the UK stock market, because it would likely lead to a rally in the pound which would see the share prices of the big international companies pared back.

The level of the FTSE at the end of the year is really anyone’s guess so I’m just going to play the averages – the index returns about 5 per cent on average each year, not including dividends, so I’ll go for 5 per cent above its current level at 7,750.

Stock tip: Burberry

The market may not like the fact the new CEO’s plans mean revenue and profits looks set to flatline for the next couple of years, but we can see the rationale of consolidating its position at the very top of the value chain. This means potential sales and profits are being forfeit, so Burberry is taking a bit of a gamble. However, Marco Gobbetti has clearly come to the conclusion that selling in non-optimum conditions, and thus potentially diluting the premium image, is the greater risk. In fashion at least, appearances matter, and Burberry’s 161-year-old brand is arguably its most valuable asset. The group is clearly mindful of the old adage that it takes years to build a reputation, and minutes to lose it.

As far as current trading goes, conditions have been difficult, but there are some more positive noises creeping in. After a few years characterised by key Chinese customers tightening the purse strings, the group says its “top customers” are now returning.

In the long term, Burberry should have plenty of tailwinds. It is well placed to profit from increasing affluence in the Far East, while luxury consumers are usually prepared to pay handsomely for that special item. Net cash of over £800m gives it plenty of options to expand when the time is right.

David Buik, chief market commentator, Panmure Gordon

FTSE 100 forecast: 6,800

It has been an astonishing year for global equities, with some quite outstanding performances by US markets, which have all hit record levels; also by the Nikkei which recently reached its highest level for 25 years, though well short of the record of 39,000 achieved in 1989. Hong Kong’s Hang Seng has also blazed the trail in adding over 32 per cent. The most disappointing performer of the major bourses has been the FTSE 100, which, as I write, has only gained 4.3 per cent. Why? The FTSE 100 has been totally geared this year to sterling’s performance and it has been a foreign exchange play. Some 60 per cent of the constituent stocks have dollar-related earnings; so the main gains were made last year when the pound fell from $1.50 to $1.25 as a result of the referendum. This year it has rallied from $1.25 to $1.34, hence the modest stock market gains with the uncertainty towards Brexit contributing to the disappointment.

What of 2018? There are still a number of imponderables, especially over the whether the UK can negotiate a decent trade deal with the EU, having achieved the easy part of its withdrawal from the EU by way of agreeing an agenda to go forward. Due to the perilous position of the May Government, I believe a soft Brexit will be negotiated, which will allow the pound to dance around the $1.40 level. So I see the FTSE 100 closing 2018 at about 6,800, not only for exchange reasons but because I also I believe the FTSE 100 is quite richly valued and I think growth in many sectors will be difficult to attain.

Stock tip: Faron Pharmaceuticals

The year 2018 will be all about stock picking from the FTSE 250 or AIM. Panmure Gordon’s nap for 2018, courtesy of Dr Julie Simmonds, is Faron. This share has rallied by 211 per cent this year to 825p. However, there may be plenty left in the tank with the development of its acute respiratory distress syndrome drug Tramakine. Positive news may be forthcoming in January or February.

Garry White, chief investment commentator, Charles Stanley

FTSE 100 forecast: 7,750

​Global growth should accelerate in 2018, but the UK economy is set to be a sluggish underperformer. Tax cuts will be agreed in the US and this should be positive for equity markets there, with most companies likely to use the windfall for share buybacks or special dividends. A recession or significant market correction is unlikely, but people will continue to predict these are imminent because the bull market is long in the tooth.

Stock tip: Kier Group

Kier, a property, residential, construction and services group, has seen an extended period of share price weakness, yet earnings growth is expected to be above 10 per cent for the next three years. The shares have been hit by warnings from peers, but Kier will benefit from the demand to invest in UK infrastructure and for local authority housebuilding, in which it is a national leader. The integration of recent acquisitions and implementation of new IT systems are starting to feed through to efficiencies.