FTSE

A tough year for UK Shares

The FTSE 100 ended the year down 12.5%, its worst performance in 10 years. Few sectors or, for that matter, global markets, avoided a decline.

The FTSE 100 in 2018
The FTSE 100 ended 2018 12.5% down from where it started, having failed to spend much time above its 7,687.8 starting level. This year’s roller coaster ride into Christmas did not help but, as the graph above shows, the market was mostly heading down from late May onwards.

In 2018 the FTSE 100 outperformed its FTSE 250 counterpart, helped by the large-cap index’s bias towards multinational companies. Sterling fell by nearly 6% against the US dollar over the year, although its decline against the euro was only 1.1%. The table below summarises the movements of the main FTSE indices.

Index Change Comment
FTSE 100 -12.5% A widespread decline
FTSE 250 -15.6% UK focussed cos underperform Footsie
FTSE Small Cap -12.4% Small caps beat mid cap but only match big-cap
FTSE 350 Higher Yield   -13.9% Value-investing offered no escape
FTSE 350 Lower Yield -12.0% Growth did little better than value
FTSE All-Share -13.0% Underperformed Footsie due to mid caps
FTSE Tech Hardware +34.2% Top sector: only three constituents
FTSE Tobacco -44.9% Bottom sector: BAT was biggest Footsie faller

Over the year, the dividend yield on the FTSE All-Share rose from 3.59% to 4.46%, implying dividend growth of 8.1%. However, as last year, this figure needs to be treated with caution because the poor performance of sterling will once again have boosted the value of the dollar-denominated distributions from the heavyweight dividend payer likes of BP, HSBC and Shell.

The rise in the equity dividend yield contrasted with a 0.1% drop in the 10-year gilt yield which ended 2018 at just 1.14%. Two-year gilt yields, more sensitive to base rate than their longer brethren, rose from 0.49% to 0.75%, almost perfectly matching the 0.25% increase in the base rate over the year.

The performance of the UK equity market appears below the global average. In sterling terms, the MSCI World was down 4.9%. However, that worldwide performance was helped by the relatively strong (but still negative) US market: the MSCI World ex USA recorded a fall of 11.2%.

In the emerging markets, outside Brazil, investors returns were mostly in the red: The MSCI Emerging Markets Index was down 11.5% in sterling terms. The blight of the index reform also struck – in the year MSCI added mainland China to its EM indices, the country’s stock markets had a hard time – the Shanghai Composite ended down almost 25%.

In 2017, the Footsie closed the year at an all-time high of 7,687.77, having never fallen below 7,100. However, 2018 marked a return to a less benign environment, not only in the 12-month return figure, but also with the re-emergence of volatility. With a yet undetermined form of Brexit theoretically less than three months away, 2019 could be an equally ‘interesting’ ride. The one potential redeeming feature is dividend yield, which is close to a nine-year high and nearly twice covered by earnings.