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Why The Outlooks For Lloyds Banking Group PLC, Travis Perkins plc & Rolls-Royce Holding PLC Have Changed

Analysing the UK economy — or more importantly, forecasting where it’s headed — is no easy task.

Policy makers have been trying to pull the economy away from one that is consumer driven, to one that is more balanced — incorporating growth from the manufacturing, construction and export sectors.

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How’s that going for you?

Unfortunately, especially for the Tories, it’s simply not happening as well as was hoped for. In fact, it’s barely happening at all. Earlier, this week the Office for National Statistics produced data showing that the economy grew by 0.5% in the final three months of 2014. That’s actually down from the 0.7% growth recorded in the third quarter.

The problem is clear, the solution is not

It’s all very well to lower interest rates and ‘print money’ to stimulate the economy, but that stimulus has to penetrate through several layers of the economy. At the moment — as is the case in other parts of the world — it seems to be doing the world of good for the financial services sector, but not much else.

The construction sector, for instance, contracted by 1.8%. Travis Perkins (LSE: TPK) is a building products company and is obviously exposed to growth in this sector. The company’s already on a reasonably tight profit margin of 4.5%. It also has a P/E ratio of 17 and earnings per share growth of less than 1%. If the construction sector contracts further, it’s hardly going to be good news for investors in this stock.

Then you have manufacturing. It grew by just 0.1% last quarter. That was its worst performance since the start of 2013. Manufacturing companies around the world have been hit hard in the wake of the Great Recession, but Britain’s manufacturers have been hurt particularly badly. There are several reasons for that but two reasons include the fall of the Eurozone economy (Britain’s major trading partner), and the strength of the pound. Sanctions imposed on Russia have not helped either.

Rolls-Royce Holding (LSE: RR) (NASDAQOTH: RYCEY.US) has been a casualty of this. After putting on a brave face in 2014, it recently fronted the public to say, “Group underlying revenue will be in the range of plus or minus 3% and profit in the range of plus or minus 3% compared with our expected outcome for 2014”. It’s hard therefore to see conditions improving significantly for Rolls-Royce in the short-to-medium term.

Uncertainty

The manufacturing, construction and export sectors also benefit greatly from certainty. Analysts have repeatedly said the upcoming general election is one of the great sore points for the economy (and the market) because it represents so much uncertainty.

So where is the money?

As I mentioned earlier, one sector that seems to be doing okay is the financial services sector. That includes the banks. In particular, this Fool sees very little room for a rate rise in the foreseeable future, which is good news for Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) — which controls much of Britain’s housing market. I won’t make any comments as to whether the property market actually needs further stimulus, but I’m sure Lloyds’ executives won’t be complaining about it.

The British consumer is still using the British financial services system, and the system is making money, so investors will benefit from that. Assuming the economy doesn’t go backwards from here, it’s also reasonable to assume that Lloyds’ profit margin will benefit when Mark Carney finally decides to raise interest rates.

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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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