Timing the market is fraught with difficulty. It is all too easy to buy the right share at the wrong time, which can lead to major losses. However, it is still often the case that the most profitable investments are made when the outlook for a company, industry or economy is at its worst. For example, in the credit crunch the FTSE 100 sank to around 3,500 points and now trades at over twice that level. With that in mind, now could be the right time to buy Lloyds (LSE: LLOY) due to the dangers it faces.
The outlook for the UK economy is arguably the most uncertain since the credit crunch. The difference this time, though, is that the global economy’s outlook is much better than that of the UK. In other words, during the credit crunch the UK was suffering because of a global financial meltdown. However, this time around the UK faces internal problems and challenges which have largely been brought about by the decision to leave the EU.
Certainly, leaving the EU could prove to be a good thing for the UK economy in the long run. It may lead to increased prosperity and less bureaucracy. However, the reality is that in the short run it is almost certain to mean considerable uncertainty. When Brexit negotiations kick off next week between the UK and EU, a two-year period where the country’s economic future is in the balance will start. Therefore, businesses are likely to hold back on investment to some degree, consumers may decide to postpone major purchases and investors may sit on the sidelines and wait for greater clarity on the future for the British economy.
While uncertainty is set to rise, share prices could remain relatively resilient. Many of the potential challenges facing the UK appear to have already been priced-in to valuations. In the case of Lloyds, its price-to-earnings (P/E) ratio of 9.9 and price-to-book (P/B) ratio of one indicate there is a wide margin of safety included in its valuation. Both ratios suggest the bank’s share price could rise by over 50% without becoming grossly overvalued, while a lack of potential downside makes the company’s overall risk/reward ratio seem attractive.
As such, there appears to be an opportunity to buy Lloyds at a discount to its intrinsic value. In the short run, its performance may be somewhat disappointing as uncertainty surrounding Brexit builds. And if negotiations do not run smoothly, this could lead to a degree of pressure on its share price. However, in the long run it could deliver stunning share price gains – especially if Brexit proves to be a success for the wider UK economy. Although there is no guarantee that will happen, the odds seem to be stacked in an investor’s favour when it comes to buying into Lloyds at the present time.
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Peter Stephens owns shares of Lloyds Banking Group. 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.