By Helen Reid
LONDON (Reuters) - Britain's top stock index will claw back some ground next year after a bruising 2018 but gains will be much more muted than originally expected, brokers, fund managers and analysts predicted in a Reuters poll on Wednesday.
Investors must navigate Britain's formal exit from the European Union in March and some see a likelihood of a snap general election next year too, opening the possibility of a Labour government replacing the ruling Conservatives.
While the previous Reuters poll in August saw the FTSE 100 <.FTSE> almost reaching its May 2018 record high of over 7,900 by the end of next year, the Nov. 13-27 survey knocks 400 points off that estimate.
The median forecast of almost 30 respondents was for the FTSE 100 to end 2019 at 7,500 points. The index was expected to end this year at 7,185 points and reach 7,357 points by mid-2019.
Those results are in keeping with a progressive worsening of sentiment around Britain's top stock index. In a survey taken six months ago, respondents had expected the FTSE 100 to hit 7,900 already by the middle of next year.
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Respondents see the FTSE 100, which closed at about 7,016 on Tuesday, rising roughly 2 percent into the end of this year. However, this won't be enough to turn around the rough ride of 2018 which delivered volatility shocks and growth worries as well as political uncertainty in the UK.
BREXIT CRUNCH LOOMS
Fears that Britain would fail to reach a Brexit deal with the EU have been eased by an agreement signed last Sunday. But these have been replaced by worries that the Westminster parliament will vote down the deal which Conservative Prime Minister Theresa May is describing as the "best possible".
"The market is currently transfixed by whether the UK ends up with a 'Deal Brexit', 'No Deal Brexit', or even 'No Brexit' - each of these probabilities shifting with the newsflow. Beyond this though, the market will have to start thinking about the implications of a potential Labour government," said Chi Chan, director of European equities at Hermes Investment Management.
Parliament votes on the Brexit deal on Dec. 11.
Global fund manager allocations to UK equities have fallen to one standard deviation below the long-term average, according to a survey this month by Bank of America Merrill Lynch which also found investors see UK companies' profits outlook as the least favourable.
"Anything which gives a semblance of hope and faith that the Brexit angst and uncertainty may be worked through is going to provide some scope for these moves to be reversed - and much more," said Chris Bailey, European strategist at Raymond James.
So far this year the FTSE 100 has lost about 8.5 percent. That followed two years of gains as the exporter-heavy index benefited from a weak currency since vote on June 23, 2016 to leave the EU.
A strengthening U.S. dollar was partly to blame, as was domestic political uncertainty, while rising volatility globally meant UK stocks experienced many more frequent swings than in 2017.
Sterling could turn into a weight on the index next year, though, should a smooth Brexit be achieved, encouraging the Bank of England to raise interest rates faster than expected.
However, the UK market remains cheaper than euro zone stocks on a forward price-to-earnings basis and its dividend yield is very high, attracting some investors to it.
"The sectoral composition of the FTSE 100, tilted towards commodities and defensives, supports late cycle out-performance," said Paul O'Connor, head of the multi-asset team at Janus Henderson.
"We also think the market is cheap and take some contrarian comfort from the fact that investor sentiment about UK assets is already extremely depressed."
Graphic: UK dividend yields climb Nov 27 (https://tmsnrt.rs/2Rd6NFP)
Graphic: Bumpy ride FTSE 100 2018 Nov 2 (https://tmsnrt.rs/2Rgzi5J)
(Reporting by Helen Reid, Danilo Masoni, Julien Ponthus and Josephine Mason; editing by David Stamp)