Despite fears that the UK economy could be in for heavy weather from 2017, investor appetite for Royal Bank of Scotland Group (LSE: RBS) has marched steadily higher during the past few months.
The financial giant has seen its share value stomp 18% higher since the end of October. But I believe savvy shareholders should consider cashing in on these gains.
Sure, economic data since June’s EU referendum may not have been as disastrous as many economists had predicted, sweeping RBS away from the summer’s eight-and-a-half-year troughs. But economic data more recently suggests that the banking sector may be in for a tough time in the months ahead, like rising inflation and a weakening jobs market. RBS already faces a worrying revenues outlook following the aggressive asset-shedding of recent years.
However, a sliding UK economy is not the only problem as it faces up to a probable leap in misconduct-related costs. The Financial Ombudsman has witnessed a fresh surge in PPI claims recently as a possible FCA deadline looms into view. And last week RBS was forced to stash away an extra £3.1bn to cover costs related to the mis-selling of financial products in the US prior to the 2008 crash.
And in my opinion RBS’s valuations certainly don’t leave room for further share price strength. A predicted 19% earnings rise in 2017 — a figure I believe could be downgraded sooner rather than later — results in a P/E ratio of 14 times, above the benchmark of 10 times indicative of high-risk stocks.
And a 0.2% dividend yield lags the FTSE 100 forward average of 3.5% by a considerable distance. Besides, RBS’s failure to hurdle Bank of England stress tests late last year leaves questions around whether the bank will be able to meet even this modest payout projection.
I fully expect the share price to trek lower again as we move through 2017.
Bed down
Accommodation play InterContinental Hotels Group (LSE: IHG) has also seen its share price shoot higher in recent months, the stock gaining 21% in value since the latter days of October and powering to record highs just on Friday.
And I believe investors have a lot to get excited about looking ahead. InterContinental Hotels saw US revenues per available room (or REVPAR) tick 1.4% higher during July-September. And occupancy rates rose above 75% thanks to “continued record levels of industry demand.” Strong economic growth Stateside should continue to fuel demand for its beds.
But North America isn’t the only story, certainly in the long term, and I expect the company’s expansion drive across both developed and emerging economies to create exceptional revenues growth.
So despite InterContinental Hotels dealing on a slightly-expensive forward P/E ratio of 21 times, I reckon City projections of sustained double-digit earnings growth from this year warrant serious attention, even at current prices.
