I think most FTSE 100 shares will be largely unaffected by Brexit, because the underlying businesses won’t be any different before and after the event.
Saying that, the reduction in uncertainty could attract money back to the stock market in general and help push shares up across the board. I think it will be slow, but as I see the FTSE 100 as having become more and more undervalued over the past few years, an uprating is inevitable.
Good for banks?
But I really see the banks as heading the list of shares that could go either way, and Barclays is one of my prime targets, along with Royal Bank of Scotland.
If we strike a favourable deal with the EU, I can see a collective sigh of relief sweeping over the banking sector, and investors (especially the institutional ones who are scared of being seen holding short-term losses when their quarterly assessments come up) might just, finally, see it as acceptable to be buying and holding bank shares again.
Barclays is not without its risks, and there are still issues related to its bailout with Qatari money back during the crisis. But it’s just turned in a set of results that look seriously impressive.
Even after litigation and conduct charges of £2.2bn (the biggest part of which was the £1.4bn settlement with the US Department of Justice relating to mortgage-back security issues), the bank still recorded a pre-tax profit of £3.5bn for the year ending 31 December 2018.
That’s in line with 2017’s figures and stripping out those one-off charges leaves an underlying pre-tax profit of £5.7bn.
Operating costs are falling, and bad debt impairments dropped by 37%, so everything seems to be going steadily in the right direction. And the crucial measure for me was seeing the dividend more than doubled from last year, to 6.5p.
That’s a yield of 4.1%, which isn’t quite up to the 6% levels from Lloyds Banking Group, or 5% from RBS, but there’s a solid argument that slow and steady is the way to go with dividend rises. In any case, forecasts see Barclays’ dividends climbing to around 5.4% by 2020, when they’d be close to three times covered by earnings.
Forecasts for this year put Barclays shares on a P/E of only seven, dropping almost as low as six on 2020 predictions. Why is it so low?
The big risk I see is the fallout from a possible no-deal Brexit, and the likelihood of that outcome seems to be increasing. If it should happen, we really don’t have any clear idea of what effect it will have on cross-border trade, or on pan-European businesses like banking.
I reckon our FTSE 100 banking shares could take a further hit, and it could be a big one. And the long-term Barclays recovery that I fully expect could be preceded by yet another dip. So what should you do?
I have a reasonable stake in Lloyds and I’m happy to keep that for what I see as the inevitable banking recovery. But I also have some cash to invest right now, and I’ll hold some of that back in case there are some immediate post-Brexit banking bargains served up.
Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.