2019 was a volatile year for the UK stock market and with the global political situation such as it is, I think 2020 is set to offer up more of the same.
If you own shares in Lloyds Banking Group (LSE:LLOY) then you’re probably wondering whether this stock market volatility could affect the share price. Or if you’re considering buying shares in Lloyds, then you’ll also be interested to know what kind of impact stock market volatility could have on your portfolio.
Political showdowns, Brexit, a slowing world economy and ongoing international trade concerns have all contributed to stock market fluctuations in recent months.
Not all of these directly affect Lloyds but being a UK-focused bank, it is highly exposed to the British economy and the local property market, both of which have already been impacted by Brexit.
Despite an end finally being in sight, Brexit is still not concluded and is likely to take at least a year to iron out finer details before a true assessment of the impact on the economy can be established.
Lloyds has a low price-to-earnings ratio of 11, and earnings per share are 5.5p. While these financials are appealing at first glance, it is important to consider the bigger picture. The business has struggled in recent times due to external factors and self-inflicted woes such as an influx of last-minute PPI claims. Therefore, with reduced confidence in the banking sector, stock market volatility impacted the Lloyds share price both for better and worse in recent months.
While Lloyds is always likely to have a market for consumers requiring loans and mortgages, demand is usually lower when interest rates and the economy are uncertain. UK interest rates have been low for a long time now and with so much uncertainty hanging over the economy, I think they’re unlikely to increase soon. Also, there’s increasing competition in the banking sector from cheaper online offerings.
Stay strong and hold
I think a diverse portfolio containing a variety of shares is essential when investing in the stock market. This is one way to reduce your risk in volatile times. Strong companies with a history of paying dividends are also a good choice because the dividend income brings predictable returns, reducing the risk to capital and increasing overall gains.
Seasoned investor Warren Buffett recommends a buy-and-hold investment strategy and although choosing good companies in the first place is key, being confident enough to hold them through troubled times is also essential. If I owned Lloyds shares, then I wouldn’t rush to sell because eventually, interest rates should rise and as Lloyds is an established FTSE 100 company with a generous dividend yield of over 5%, I think it’s worth holding on.
But all things considered, I’m not a fan of Lloyds Banking Group as a buy at the moment. I’m steering clear of the banking sector and think stock market volatility could continue to suppress the firm’s shares in the months ahead.
By far, the most attractive aspect of Lloyds is its dividend yield, but I’m not sure this is enough to offset the risk to capital investment and its shares could still weaken this year.
Don’t be disheartened though, there are plenty of other great dividend shares in the FTSE 350, with good earning potential and less risk attached.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.