2020’s been tough for UK share investors, and things have been especially hard for Lloyds Banking Group (LSE: LLOY) shareholders. The Lloyds share price is down 55% so far in 2020 because of the battering Covid-19 has inflicted on the British economy.
It seems the market thinks things could be looking up for the battered FTSE 100 bank, though. Lloyds shares have galloped from the nine-year lows hit in mid-September as bargain hunters have piled in. Could now be the time to finally plough into this sunken UK share?
A look at Lloyds
My answer is an emphatic ‘no.’ Recent buyers of Lloyds stock might be hopeful that the domestic economy is beginning to rebound. Official GDP data released this morning, however, confirms my view that investing in UK-focussed cyclical shares like this remains a huge gamble. Growth came in at just 2.1% in August, missing broker forecasts and marking another monthly slowdown. By comparison, GDP expanded 6.6% in July.
Those latest ONS numbers have inflamed concerns about the British economy slipping back into contraction during the fourth quarter. State support is starting to be scaled back considerably, and it’s doubtful the government will be able to step in again should the economy indeed begin to list.
It’s possible that more Bank of England rate reductions will be needed to get GDP firing again. It’s a scenario that policymakers continue to publicly flirt with in another worrying sign for Lloyds investors. A policy of ultra-loose monetary policy took a huge bite out of banking sector profits in the decade after the 2008 financial crash. The introduction of negative rates would be a disaster for Lloyds et al.
A risk too far?
At The Motley Fool we believe investors should buy UK shares for the long term. Over this sort of timeframe quality shares with strong balance sheets tend to overcome tough economic conditions and sail through temporary share market volatility to deliver terrific returns.
I’m afraid though that Lloyds doesn’t fit into this category. It’s not just rising Covid-19 infection rates and the threat of more lockdowns that the FTSE 100 bank has to contend with. The threat of an economically-disruptive Brexit also threatens to heap pressure on the clobbered UK economy. And these are issues that threaten to hammer profits at Lloyds for years to come.
The Lloyds share price is worth around a third of what it was five years ago. And I fully expect it to resume its slide before too long. At current prices, the UK share trades on a high valuation, a forward price-to-earnings (P/E) ratio of 29 times. It also fails to offer investors any sort of dividend.
There’s little reason why share pickers should take a chance with this high-risk share, in my book. I’d much rather go bargain-hunting elsewhere.
Royston Wild 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.