Which stock would you want to find in your Easter egg this year? Lloyds (LSE: LLOY) or Standard Chartered (LSE: STAN)?
Here’s why the answer is not straightforward.
Easter Egg, 2014 — Was It Any Good?
If you had invested in Lloyds about a year a ago, you’d have recorded an all-in return of 3.2%, which is only slightly above UK inflation over the period. By contrast, the losses with Standard Chartered would have been mitigated by a nice income from dividends, but you’d still have lost about 9% of your invested capital.
Call me insane, but I’d still buy Standard Chartered rather than Lloyds, although Standard Chartered stock carries much more risk than Lloyds shares. The former is not exactly a safe equity investment — but which bank is?
Standard Chartered could be highly volatile, as recent trends show, and while its capital ratios seem to be in good order, nobody really knows how much bad stuff sits on the asset side of the Asian bank’s balance sheet.
If you are willing to hold onto it for enough time, however, it could well reward you with an outstanding performance over the medium term, I reckon. Of course, Lloyds may be a more appropriate choice for a retirement portfolio, but then several other stocks outside the banking sector are more appealing than Lloyds.
Easter Egg, 2016….
So, what’s going to be your all-in return in one year?
With Lloyds, the answer may be well 5%, including dividends. Why so?
Well, Lloyds is between a rock and a hard place.
As you may know, with the elections in the UK due next month, political risk weighs on the stock because the new government will have to decide what to do with its residual stake in Lloyds, which amounts to about 20%.
If the Treasury holds for longer than expected, Lloyds will come under pressure, while if the Treasury continues to sell stock on a monthly basis, just as it has done recently, the value of Lloyds will unlikely rise much from 75p-80p. It currently trades at 78p.
Since 1 January, Lloyds has risen 2.8%, only a few points above inflation in the UK. The payout ratio is expected to rise, but I am worried about the domestic landscape.
Domestic Landscape
“For the first time since 1960, the UK is currently experiencing zero inflation,” the Guardian reported this week.
What this means is that interest rates may be on hold for much longer than expected. If rates rise swiftly, however, they could do more harm than good. Hence, you should look for value in a bank whose geographical reach is mainly outside the UK.
There are a few reasons why Standard Chartered may be your preferred choice, even though its shares have already risen 13% this year.
For example, its relative valuation, as gauged by multiples for earnings and tangible book value, still points to value. The same cannot be said for Lloyds…
