Another day, another shocking set of data on the state of the UK economy. On Friday the Office for National Statistics announced that domestic GDP collapsed 20.4% in April, the biggest monthly drop ever. Ultra-cyclical stocks like FTSE 100-quoted Barclays (LSE: BARC) are likely to have suffered another ‘mare, then.
Unless a second wave of Covid-19 infections hits later this year, Britain is likely over the worst of it. That’s not to say that Barclays and the other Foostie banks like Lloyds and RBS are out of the woods. Indeed, the boffins over at ING reckon that the economy will tank 9% in 2020, the bank noting that “social distancing constraints, consumer and business caution, as well as Brexit, all pose challenges to the UK economic recovery”.
Trouble on all sides
You don’t need to just consider the possibility of a prolonged and painful global recession, however. The consequent prospect of ultra-loose, profits-crushing monetary policy from the Bank of England creates another problem that investors need to worry about. The fact that Threadneedle Street is now openly contemplating negative interest rates underlines the seriousness of the issue.
Established banks like Barclays also face the growing threat posed by the challenger banks. Research from digital banking tech provider Crealogix shows that around 14% of Britons now bank with one of these new kids on the block. And staggeringly, around a quarter of citizens under the age of 37 do business with one of the challengers.
Barclays’s shocking share price performance shows that it’s been on the rack long before Covid-19 broke out. It’s fallen 55% in value during the past five years and there’s no reason to expect it to bounce back. I wouldn’t tough this battered FTSE 100 stock with a bargepole.
Another FTSE 100 trap?
Pearson (LSE: PSON) is another Footsie share where the long-term risks are too great. The educational materials provider has leapt 12% on Friday after it emerged that Cevian Capital holds a chunky 5.4% stake in the business. It has raised hopes that a much-needed shakeup of the company is in the offing. The departure of chief executive John Fallon could certainly make it easier for the activist investor to have its way.
But will the move change Pearson’s fortunes considerably? It still has to overcome the immense challenges created by falling enrolment in the US college system and growing demand for low-cost teaching aides.
Indeed, this is a problem that could worsen significantly over the medium term following the coronavirus crisis and the subsequent economic downturn. A recent study from the Institute of International Education suggests that 90% of colleges expect enrolment by non-US students for the 2020–21 academic year to drop on an annual basis. Expect meaty drops among US students, too.
Like Barclays, Pearson’s share price has plummeted by more than half during the past five years. And there’s plenty of reason to expect it to keep on sinking.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, and Pearson. 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.