Would a Brexit send Barclays plc crashing downwards?

Should you avoid Barclays plc (LON: BARC) ahead of the EU referendum?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Barclays (LSE: BARC) has been a perennial underperformer. Its shares have fallen by 21% this year as its new strategy has seemingly fallen flat with investors. And with its shares having underperformed the FTSE 100 by 40% in the last five years, many investors may have lost hope that they’ll see upbeat capital gains in future.

In the short run, Barclays and the wider UK banking sector faces a major risk in the form of a Brexit. With polls showing that the British public is split almost 50:50 on whether to leave or remain in the EU, Barclays’ share price could be highly volatile in the coming weeks. That’s because if Britain leaves the EU, then all bets are off in terms of what the impact will be on the economy.

The Bank of England has stated that the impact could be significant in the short run. And with a major nation leaving the EU being an unprecedented event, it would be unsurprising if Barclays’ share price came under considerable pressure in the aftermath of a ‘leave’ vote – simply because investors will be very uncertain as to how the British banking sector will perform in future years.

Safety margin

Of course, Barclays already offers a wide margin of safety and it could therefore be argued that its shares may be hit less hard than a number of its more highly rated rivals. For example, Barclays trades on a price-to-earnings (P/E) ratio of just 11.3 and this indicates that the market is already pricing-in near-term challenges for the bank.

Looking ahead, Barclays has considerable growth potential. Certainly, its decision to reduce dividends has been unpopular and it means that the income return that was due to rapidly rise is now likely to be rather subdued. However, it also means that Barclays could move into a more financially sound space, with a greater proportion of earnings being used to beef up its balance sheet and reinvest for future growth.

Evidence of Barclays’ growth potential can be seen in its forecast for next year. The bank is expected to increase its earnings by 49% in 2017 and when combined with its low rating, this equates to a price-to-earnings growth (PEG) ratio of just 0.2. This indicates that while Barclays’ share price has disappointed in the past, it could be a star performer in the long run.

Between now and then, Barclays has an EU referendum to survive and a number of strategy changes that may prove painful and unpopular among investors. However, with a sound asset base, a strong management team, a wide margin of safety and a global economy that may prove to be more resilient than many investors realise, Barclays remains a sound long-term buy for investors who can live with a relatively uncertain outlook.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »