Market volatility has been extreme in recent weeks as a trio of events rock investor confidence. Rocketing inflation, war in Eastern Europe, and resurgent Covid-19 cases in China are issues that could continue to rattle investor nerves too. Cyclical stocks like Lloyds Banking Group (LSE: LLOY) and its share price are in particular danger of extra choppiness.
But at current prices could the FTSE 100 bank be considered too cheap to miss? Today, Lloyds trades on a forward price-to-earnings (P/E) ratio of 7.7 times. This is well inside the broadly-accepted value watermark of 10 times and below. On top of this, Lloyds carries a meaty 5.1% dividend yield at current prices.
So is the Lloyds share price the best FTSE 100 bargain that money can buy right now? Or is this a stock I should avoid like the plague?
Interest rates are rising…
News of soaring inflation has actually helped Lloyds’ share price claw back ground. The additional upward pressure on prices created by the tragic events in Ukraine has raised the prospect of more severe interest rate hikes by the Bank of England (BoE) than many had been expecting.
Higher interest rates are good because they widen the difference between the rates banks offer to savers and to borrowers.
The BoE raised rates again last week to a two-year high of 0.75%. The central bank’s policymakers raised their consumer price inflation (CPI) forecasts again too, fuelling speculation that interest rates will keep sprinting higher.
The Monetary Policy Committee said that it expects CPI to take out its previously-predicted peak for 2022 of 7.25% by “several percentage points”.
… but will they continue increasing?
However, the inflationary boom in Britain also poses a significant threat to Lloyds and its share price. As the cost of living crisis escalates and consumer spending moderates, the outlook for the domestic economy is darkening.
Banks like Lloyds then, face the prospect of cooling revenues and a rise in bad loans following the post-pandemic rebound.
The impact of price rises on the economy could also see the BoR raise rates less severely than predicted, dampening those profits Lloyds makes from its lending activities.
The MPC said last week that “further modest tightening in monetary policy may be appropriate” as inflation rises. Last month, the body said that such tightening later in 2022 was “likely”.
The verdict on Lloyds’ share price
I’d be prepared to look past the immediate uncertainty Lloyds faces if the bank’s long-term investment case was compelling. But the FTSE 100 bank faces some significant problems in the years ahead too.
Competition from the challenger banks is likely to remain fierce. Interest rates appear set to remain well below their pre-2010 levels as well, keeping a lid on profits.
And unlike other cheap banking shares like HSBC and Santander, Lloyds doesn’t operate in fast-growing overseas markets. Its reliance on a strong UK economy is a huge risks as the costs of Covid-19 weigh and the impact of Brexit continues adding up.
So despite Lloyds’ cheap share price, I’m not tempted to buy the business right now.
