It’s not hard to see why many UK share investors are tempted by the Lloyds (LSE: LLOY) share price today. City forecasts suggest that the FTSE 100 bank’s annual earnings will rocket 140% in 2021. This leaves the company trading on a low forward price-to-earnings (P/E) ratio of 12 times.
This isn’t the only reason Lloyds looks a terrific stock on paper either. Analysts are suggesting the bank will begin paying dividends again following last year’s payout cancellations. Consequently the FTSE 100 firm sports a gigantic 5% dividend yield for 2021 too.
Economic risks are rising
These bullish forecasts are of course built on expectations that the British economy will roar back into life this year. I’m not so sure that this will happen, however. This casts a cloud over Lloyds’ outlook for 2021 at least, along with a swarm of other UK shares.
A study by the National Institute of Economic and Social Research (NIESR) illustrates the creeping sense of gloom about the British economy. It says that “the resurgence of Covid-19” has forced it to take the scythe to this year’s economic forecasts. The body now expects GDP growth of 3.4% in 2021, down from a prior estimate of 5.9%.
The NIESR says that growth could come in even weaker than this too. It predicts that “there are major risks to the downside associated with the rollout and effectiveness of vaccines [and] the emergence of new Covid-19 strains and their effect on the path of the virus.” This has the potential to stretch lockdown measures out for longer and cause more pain to domestic demand, it said.
There are reasons why I think Lloyds could possibly still deliver stonking earnings growth in 2021, however. Those mass Covid-19 vaccinations are being rolled out at an impressive pace, while recent lockdowns have caused infection rates to slump. Steps to intensify the pace of cost-cutting will also provide a boon to the UK share’s bottom line this year and beyond.
I’d rather buy these UK shares
I won’t be taking a risk with Lloyds, however. I think the risks facing cyclical, UK-focused shares like this are far too great. There’s no shortage of other cheap stocks on the FTSE 100 alone that look in better shape than the Black Horse Bank, in my opinion.
Take B&M European Value Retail for example. This business could lose sales to online retailers if Covid-19 lockdowns continue through 2021. But I’m still convinced its revenues will rise as tough economic conditions cause shoppers to seek out low-cost goods in greater numbers. This company trades on a rock-bottom forward price-to-earnings growth (PEG) ratio of 0.2.
I’d also prefer to buy Vodafone Group in my Stocks and Shares ISA today. This UK share generates only around 15% of revenues from these shores. The FTSE 100 company might take a hit if business revenues struggle in the short-to-medium term, sure. But history shows us that telecoms tends to be a defensive sector where revenues remain stable during economic upturns and downturns. Today Vodafone trades on a PEG ratio of just 0.6.
