The FTSE 100 continues to struggle for traction following the 2020 stock market crash. Britain’s premier share index has struggled to build on its initial bounce and as a result, lots of UK shares appear too cheap to miss. But how do I sort the duds from the share market superstars?
A risk too far?
Lloyds Banking Group (LSE: LLOY) shares look mighty cheap based on broker forecasts for 2021. The blue-chip bank is expected to see annual earnings rebound more than 200% next year. And this leaves it trading on a rock-bottom forward price-to-earnings (P/E) ratio of 8 times. I won’t be buying this FTSE 100 firm any time soon, though.
It’s not just the risks of a prolonged Covid-19 economic hangover that threatens Lloyds’ bottom line, although this is a significant consideration (the UK has been one of the worst-performing major economies since the coronavirus outbreak). And it’s not just because the threat of a no-deal Brexit is rising, a development that would probably create huge problems for the economy for much longer than Covid-19 likely will.
It’s that the Bank of England remains hell bent on maintaining low interest rates for a prolonged period of time. To illustrate the point, just this week bank chief Andrew Bailey signalled that he’s prepared to drop the bank’s 2% inflation target. This signals that Threadneedle Street is looking to keep interest rates lower for longer and puts another question mark over Lloyds and its profits outlook.
A better FTSE 100 share
These comments by Mr Bailey mirror similar sentiments to the US Federal Reserve in recent months. Back in August, Jerome Powell, head of the central bank said that he was also considering changing the body’s inflation goal. Interest rates Stateside are, as in the UK, also rattling around record lows.
Bad for savers and bad for banks like Lloyds. But further good news for companies that make money from assets that thrive in such an environment. We’re talking about precious metals producers like Fresnillo (LSE: FRES) of the FTSE 100, for example. When fears over the legitimacy of paper currencies rise, investors pile headfirst into hard currencies like gold and silver.
No wonder City analysts expect Fresnillo’s yearly earnings to more than double in 2021. Though inflationary concerns aren’t the only reasons why the Footsie share’s profits appear on course to fly. The threat of Covid-19 raging long into next year, and a failure to produce a vaccine soon (if at all), should keep safe-haven demand for Fresnillo’s metal heading northwards.
All these reasons explain why plenty of analysts are bullish on the gold and silver price. The prices might have stepped back recently, but this is on the back of solid profit booking following 2020’s mighty gains. I fully expect precious metal prices to rocket again. And I reckon FTSE 100-quoted Fresnillo is a great way to play this theme.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.