The FTSE 100 leading index of shares has had a good year, so far. Up 7.8%, some quality stocks have rightly soared in value following years of underperformance.
But amid the investor buzz, some overhyped names have also soared in value. This, I think, leaves them in danger of a severe correction in 2025 if the market wises up.
Lloyds (LSE:LLOY) is one FTSE 100 share I’ll be avoiding like the plague. In my opinion, its 15.1% share price rise this year fails to reflect three massive dangers it faces in 2025 and potentially beyond.
Should you invest £1,000 in Burberry Group Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Burberry Group Plc made the list?
Red lights flashing
The first is the worsening outlook for the UK economy. In news which shocked the City, GDP data on Friday (13 December) showed the economy shrank for the second straight month in October.
Amid these toughening conditions, Lloyds — which reported loan growth of just 1% last quarter — could find it even tougher to increase business. Added to this, credit impairments might also accelerate as Britons struggle to make ends meet.
On the plus side, a likely fall in interest rates could stimulate credit demand. But at the same time this creates another large problem for banks, namely a steady fall in net interest margins (NIMs).
The threat to margins is also rising as challenger banks and building societies roll out ultra-attractive products in new areas.
Recent NIM data is already alarming. Lloyds’ third-quarter NIM slumped 21 basis points in Q3 to 2.94%.
Car crash
The final threat to Lloyds and its share price is potentially the most severe. In a story reminiscent of the payment protection insurance (PPI) scandal earlier this century, motor finance suppliers face potentially crushing penalties if found guilty of mis-selling loans.
To recap, the Financial Conduct Authority (FCA) is probing commissions paid from lenders to car dealers without customers’ knowledge. And the potential for thumping penalties has soared after the Court of Appeal in October ruled consumers couldn’t have consented to these ‘hidden’ payments.
The numbers being suggested are truly staggering. The Bank of England says financial redress across the industry could total £25bn. Other analysts put it even higher, with some estimating it could be double that.
Lloyds has set aside £450m so far to cover potential costs. But given its position as a significant car finance provider — it commands around a third of the market — the eventual penalty could be substantially larger.
It’s one I’m avoiding
There are some chinks of light for Lloyds amid the gloom however. The housing market’s steady recovery is encouraging given the bank’s position as a major mortgage provider. Efforts to digitalise its operations are also paying off, with 22m of its 27m customers now logging on to bank.
Lloyds’ low price-to-earnings (P/E) ratio of 8.4 times could also continue to attract attention from bargain hunters.
But on balance, the possibility of Lloyds’ share price suffering a correction after this year’s gains remain too great for me. And even if it doesn’t slump, the potential for further rises in 2025 look extremely limited, in my view.
So I’d rather buy FTSE 100 shares with better investment potential in the new year.
