Just when you think that we could be in for a tame week in financial markets, along comes some volatility! Over the past few weeks we have seen this in the gold price and the oil price. For me, I’d rather steer clear of both and instead look to the Lloyds Banking Group (LSE: LLOY) share price.
The oil price collapse is fresh at the moment. On Monday evening, the contract for WTI (West Texas Intermediate) oil for May delivery dropped below $0. This was something which many people thought was impossible. This meant the price dropped more than 100% in a single day.
Looking at gold, earlier this month the precious metal hit highs not seen for almost 10 years. It is up almost 8% in the past month, following a surge in demand for a safe-haven asset for investors to buy.
Why stocks over commodities?
For me, stock movements are a lot more predictable than commodity prices. You can analyse a company, along with the financial statement, current market conditions, new product launches and more and make a reasonable assumption of a subsequent share price rally. This is not the same for commodities.
Oil for example is notoriously volatile and unpredictable. It is governed far more by physical demand and supply, along with trading technicalities (such as futures contracts). You also have to take the cost of storage into account for both gold and oil, which is not the case when investing in the stock market.
Why invest in Lloyds shares?
A lot has been written recently on the slump in the Lloyds share price. It has fallen over 50% from the start of 2020. There is one large reason for this. It has been due to the impact of the coronavirus on consumers. People like you and I have been in lockdown now for over a month. Spending on our credit and debit cards have dried up and applications for new mortgages halted. At a business level, these spending cuts have been seen as well.
Lloyds is the largest retail bank in the UK and does not have the investment banking capabilities of the likes of Barclays and HSBC. This factor has made it painful for revenues and profit. Yet the reason for the share price slump is exactly the reason I think it could rally.
The stock market recovery is expected to be a ‘V’ shape, in that the sharp move lower will bounce with a sharp move back higher. We may already be starting to see this, with the FTSE 100 up around 12% in the past month. If we get a reopening of the UK economy over the next month or so, Lloyds is going to be one of the first firms to really benefit.
As soon as consumers get back out, and have the ability to spend via businesses being open, profitability for Lloyds should bounce.
I also would not wait until this happens to buy the stock. Currently it has a P/E ratio of around 9, and a price-to-book ratio of 0.44. These are historically low levels to buy for the longer term.
