While 2018 has been a challenging year for most investors, it has been especially difficult for the UK market to make progress – but some of the industry’s biggest names are expecting stronger returns in 2019.
The MSCI World ended 2018 down 3.33 per cent while the S&P 500 posted a small gain (in sterling terms) after somewhat last-minute rally. However, the FTSE All Share lost 9.47 per cent as Brexit uncertainty continued - underperforming even emerging markets, which faced their own significant challenges during the year.
However, some of the stars of the UK equity market think next year could be much better. Below, FE Trustnet finds out what Neil Woodford, Alex Wright, Mark Barnett and Richard Buxton have their eyes on as we move into 2019.
Performance of UK equities vs global equities over 3yrs
Source: FE Analytics
Neil Woodford – The ‘healthy’ UK economy 
Neil Woodford (pictured), manager of the LF Woodford Equity Income fund and Woodford Patient Capital Trust, is watching the underlying health of the UK economy. For some time, the veteran equity income manager’s argument has been that the UK economy is far healthier than most investors assume, despite the country’s decision to depart the European Union.
“As we head towards 2019, we are confident that the individual constituent parts of the UK economy will continue to deal with the prospect of Brexit in the same way that they have been doing since the referendum in June 2016,” he said.
“Our UK thesis continues to be based around more people in work, with faster real wage growth, more spending from government, a pick-up in investment and benign credit conditions. Banks will continue to grow lending and, in particular, the growth in the housing market will continue with more housing transactions, more mortgage approvals (for house purchase rather than buy-to-let) and gently rising prices. Monetary policy should remain supportive, with low interest rates, because inflation will continue to fall.”
Alex Wright – Underperforming UK rebounds
Alex Wright, who runs the Fidelity Special Situations fund and Fidelity Special Values trust, is another manager who believes that 2019 could end up being a relatively strong year for the UK market, once the uncertainty over Brexit subsides.
As the chart above shows, the FTSE All Share has lagged global equities by a significant margin in recent years as the Brexit result, lacklustre growth and political uncertainty put investors off the market. However, the manager believes this could reverse in 2019.
Wright (pictured) said: “The unrelenting negativity that investors are demonstrating towards UK equities is making me feel more and more positive on their prospects for 2019. It might be counterintuitive to think that the UK market could be among the top performers globally in the year that we leave the EU (if indeed we do). But markets have a way of confounding expectations and surprising the consensus. 
“I do not have a view on whether a soft or hard Brexit is more likely. My positive outlook for UK equities simply relies on some clarification in the relationship between the UK and the EU, which would act as a catalyst for investors to revisit the UK equity market as a destination for capital.
“It may be a cliché, but investors really do hate uncertainty, and for global asset allocators, there has been little incentive to do the work on cheap UK shares.”
Mark Barnett - Opportunities within domestic sectors
Another investor with a close eye on the UK is Mark Barnett, who runs the Invesco Income (UK), Invesco High Income (UK) and Invesco UK Strategic Income (UK) funds.
Barnett pointed out that UK revenues are now valued at around half the amount attributed to the corresponding level of US revenues, and below that of revenues from emerging markets.
Investors appear to be pricing in a recession in the UK
Source: Invesco, Barclays as at 31 Aug 2018. Market = FTSE 350
“The extent of this relative cheapness is substantial and, although the overall market is not expensive at present, the most obvious opportunities, in my view, rest within domestic sectors,” he said.
“Many are valued at multi-year lows both in absolute terms and relative to the wider market and are discounting a sharp deterioration in profits and a slowdown in the UK economy, both of which look overly pessimistic.
“Recently published economic indicators point to continued steady, if unspectacular, economic growth in the UK. As we look out towards 2019, we expect gross domestic product to be supported by continued robust employment growth and a recovery in real wages, which in turn should help to strengthen consumption growth.
“Given the forecasted increase in government spending next year and the Treasury’s flexibility to provide further injections after the Brexit date, it is reasonable, in our view, to expect the UK economy to be more resilient than most forecasts assume.”
Richard Buxton – Value in the home market
Richard Buxton (pictured), chief executive of Merian Global Investors and manager of the Merian UK Alpha fund, is closely watching the health of UK businesses, which have been ignored for several years by asset allocators worried by the UK’s looming exit from the European Union. 
“Closer to home, we see opportunities in the UK that international fund management industry seems to shy away from because they are concerned about Brexit,” he said.
“British companies are in pretty good shape. They are trading on around 14 times earnings, near the 40-year average, so not expensive. I expect the UK economy is going to gently accelerate into 2019. There is a very strong labour market and the chancellor is prepared to increase to public spending.”
Buxton added that he is not the only market participant seeing good value in the UK companies, noting that overseas corporations continue to buy British companies or parts of them, with Coca-Cola buying Whitbread’s coffee business being just one of them.
However, he also believes there is potential for a change in market leadership as central banks start to tighten the ultra-loose monetary policy that has been in place for much of the time since the global financial crisis.