For many, buying one of UK largest banks – Lloyds Banking Group (LON:LLOY) – was a seemingly safe option. Should any credit crisis emerge, surely the government would come riding to its rescue. But apart from that, what’s the rationale for sticking with Lloyds shares?
At 45p, Lloyds’ share price is not much higher than the level traded two years ago. Yes, investors are receiving a nice yield on the shares (currently at 5.44 percent) – but the lack of upward share price movement could be frustrating for long-term growth investors.
Why are Lloyds shares so low?
There are a few reasons for Lloyd’s stagnating and low share price. The first is the general downbeat sentiment on UK equities. Political uncertainty, poor UK productivity, and a lack of tech stocks are making the LSE a dull place. Also, don’t forget that the UK is due another General Election in 2024.
Another reason Lloyds is so low is the sharp rise in interest rates. This makes investors jittery about holding financial-related stocks. Will the ballooning borrowing costs lead to a credit event? If this happens, banks are one of the least desirable sectors to invest in.
Lloyds’ is not the only struggling bank stock though. Barclays and Natwest are both experiencing downward pressure on their share prices. The latter saw a near 50-percent decline this year. In summary, the market is simply not too excited about UK bank stocks like Lloyds.
Interest and infaltion
Despite the current poor sentiment on British banks, not all is lost on UK shares. There are some very interesting moves in the British stock market this year.
Look at Marks & Spencer or Centrica – two perennial ‘dogs of the Footsie’ that suddenly caught investor attention and rallied hard. The past year saw MKS and CNA gain 121 and 57 percent respectively.
What can turn Lloyds shares around? A correction in interest and inflation rates would be a good start. An improving macro background will definitely boost investor sentiment and cause the market will re-rate bank stocks higher. A stabilising property market is particularly important.
Of course, Lloyds need to stick with its earnings guidance. Third quarter net profits recently came in at £1.4 billion. This is good enough to spark a 10 percent rally in Lloyds shares in recent weeks.
You see, under some favourable conditions, UK bank stocks can still appreciate from time to time. For now, I would tread carefully and wait for better macro conditions before going all in on Lloyds.
Technically I would watch if the support at 40p can hold in the coming months.
Jackson is a core part of the editorial team at GoodMoneyGuide.com.
With over 15 years industry experience as a financial analyst, he brings a wealth of knowledge and expertise to our content and readers.
Previously Jackson was the director of Stockcube Research as Head of Investors Intelligence. This pivotal role involved providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Jackson brings a huge amount of expertise in areas as diverse as global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University and has authored nearly 200 articles for GoodMoneyGuide.com.
