The UK economy is powering ahead. The IMF predicts that economic growth will reach 2.9% this year, more than any other OECD country. Official figures are expected to confirm that wages have outstripped inflation for the first time in four years. House prices have hit records highs for two straight months running. Unemployment is anticipated to fall below 7%, yet the Bank of England is committed to keeping interest rates at record lows.
It all adds up to increasing confidence and growth; great news for shares that are geared to the UK economy. How can investors take advantage?
One of the stocks best placed to gain is Lloyds Banking (LSE: LLOY) (NYSE: LYG.US). The fortunes of banks are generally correlated with the economies they operate in. Lloyds is fundamentally a UK bank, having exited 21 countries since 2011 and virtually eliminated its European problem assets.
Market leader
Lloyds is the market leader in retail current accounts, deposits and mortgages, providing a quarter of all current accounts and one in five mortgages. The mortgage business should flourish as the housing market rockets. Bigger mortgages mean more interest income for the banks — though new rules from the Financial Conduct Authority should ensure that loan multiples do not become overstretched and so head off an unsustainable boom.
As confidence in the housing market ripples out from the South East to the rest of the country, increased volumes of new mortgages will drive more profit growth. Housing market activity cascades into other financial products such as house insurance, life assurance and personal loans.
Lloyds is also banker to a fifth of Britain’s small and medium enterprises. They should see a direct benefit from increasing consumer spending whilst greater business confidence could boost investment, fuelling business loans and services.
Sweet spot
Lloyds is in a sweet spot, having largely completed its turnaround programme. Further sales of government-owned shares, and the return to the dividend list, restore normality and make the stock investible to a wider range of institutions. And with the biggest private shareholder base in the country Lloyds could see pensioners’ money, newly-released from the obligation to buy annuities, flooding into its stock.
Rival Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) is an obvious beneficiary of economic growth. But it is still in the throes of a turnaround programme, with foreign assets and problem loans to shed and a new CEO implementing yet another restructuring. RBS’s shares are a play on how well management can implement the turnaround, and by the time the bank is back to normal the UK’s economy might not be so vibrant.
