Times are tough for the UK economy as inflation soars and the cost of living crisis worsens. Following the tragic events in Ukraine, things look set to get a whole lot more difficult too. As a consequence, I’ll continue to steer well clear of Lloyds Banking Group (LSE: LLOY) shares.
Cyclical stocks like British banks have sunk in recent weeks as investors reflected on the rising danger. The Lloyds share price actually slipped to its cheapest for a year, to around 40p, amid the market volatility. Yet I’m not tempted to go dip buying as warnings over the British economy grow.
Today saw the Centre for Economics and Business Research (CEBR) release some hair-raising predictions for the UK. In response to surging inflation and falling exports to Russia, the economics consultancy now thinks domestic GDP will rise 1.9% in 2022. This is less than half the 4.2% rise the CEBR had been forecasting.
Things get even scarier for next year as well. This is because the CEBR now predicts ZERO growth. The body had been estimating a 2% rise in UK GDP.
Why I worry for Lloyds shares
Look, I’m prepared to buy some stocks if the long-term earnings outlook remains robust. But in my opinion, the threats to Lloyds and its share price remain considerable beyond the next couple of years.
Interest rates are likely to stay well below historical levels, affecting the profits that the banks can make from their lending activities. The impact of Brexit on the economy presents another threat to Lloyds’ long-term earnings. So could the recent sanctions placed on Russia if the geopolitical environment remains tense. Finally, the steady rise of digital-led challenger banks poses another problem for Lloyds to overcome.
So I don’t care that Lloyds shares now trade on a forward price-to-earnings (P/E) ratio of just 6.9 times. I’m also not attracted to the bank’s 5.7% dividend yield for 2022. Despite the bank’s strong brand name, its huge exposure to the strong UK housing market, and the chance that interest rates could rocket in response to rapidly rising inflation, I think that the risks of owning this stock outweigh the possible rewards.
2 FTSE 100 stocks I’d buy
I don’t think that I need to take a chance with Lloyds shares, either. There are plenty of dirt-cheap stocks on the FTSE 100 alone for me to buy today, after all. One of these is Vodafone Group. Sure, the business faces massive competition in its European marketplaces, but I think the growth of 5G and soaring demand for its services in Africa still makes it a top buy. The business trades on a forward price to earnings growth (PEG) ratio of 0.8 today and carries an 6.4% dividend yield.
SSE is another brilliant bargain I’d buy today instead of Lloyds. Like Vodafone, this green energy provider also trades on sub-1 forward PEG ratio of 0.4. And it carries a 5.5% dividend yield today. Operating renewable energy technology like wind turbines is massively expensive and not always reliable. But I believe this FTSE 100 firm could still deliver explosive profits growth as demand for low-carbon power intensifies.
