I think the risks are rising for Lloyds and these FTSE 100 stocks

The economy is tanking and interest rates might be cut again. Royston Wild explains why Lloyds Banking Group isn’t the only FTSE 100 share to avoid today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the broader FTSE 100 has leapt from March’s troughs, the blue-chip banks continue to struggle for traction. Take Lloyds Banking Group (LSE: LLOY) as an example. At around 30p, its shares remain just a whisker away from last month’s eight-year lows.

This is hardly a surprise. Britain is facing the sort of economic contraction not seen for centuries as it recovers from the Covid-19 crisis. What’s really spooking investors though is the threat that the Bank of England will increase measures to support the economy.

A number of Threadneedle Street policymakers have touted the possible introduction of more monetary easing in recent weeks. A plunge into negative interest rates is also seemingly on the table, surely to the despair of Lloyds. Worryingly another member of the central bank’s Monetary Policy Committee put his head above the parapet last week to comment on what we could possibly expect.

Bank talk

Thursday saw Michael Saunders take the time to demand that the bank take “aggressive” action to combat the economic destruction caused by the coronavirus, commenting that “it is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low inflation rut”.

He added that the threat posed by rising inflation is “negligible”, providing possible justification for the Bank of England to cut rates from their current record lows of 0.1%.

Saunders speculated that the post-Covid-19 downturn could last several years, suggesting that we can expect UK monetary policy to remain ultra-doveish for the foreseeable future.

Screen of price moves in the FTSE 100

Footsie fears

The economic downturn delivers a double whammy for Lloyds and its FTSE 100 peers like Barclays and RBS. The banks can expect a prolonged environment of weak revenues and a possible explosion in loan impairments. The former has already been forced to eat a £1.43bn charge in anticipation of tough trading conditions.

Such struggles were to be expected, of course. What perhaps was not is the size of the hunger from Bank of England policy setters to follow recent emergency action with more rate cuts and rounds of quantitative easing. No wonder share pickers are reluctant to go frantically dip buying over at Lloyds, then. Rock-bottom interest rates have crushed profits creation at the banks since the 2008–09 banking crisis.

Another big danger to Britain’s banks emerged this week, too. The threat of a no deal Brexit has damaged their business over the past few years. And the chances of this economically disruptive scenario have grown over the past month. The latest danger to trade talks collapsing in June is a fresh row over fishing rights after 2020.

Combined with the economic implications of the Covid-19 saga, it looks like Lloyds will struggle during the first few years of this new decade at least. This is therefore a share that Footsie investors need to avoid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »