UK share markets have reversed on Friday as fears about a no-deal Brexit have exploded. Even the internationally diverse FTSE 100 index has slumped as news flow from London and Brussels has disappointed market makers.
British Prime Minister Boris Johnson took to the airwaves last night to laud the benefits of an ‘Australia-style’ deal (a no-deal Brexit in all but name). European Commission President Ursula von der Leyen has reportedly informed EU leaders of a “higher probability for no deal than deal” in recent hours, too. It seems as if the ground is being prepped for a messy divorce.
All this could prove to be bluster on both sides as negotiations come down to the wire. Regardless, UK share pickers need to seriously consider how to invest their cash should a no-deal Brexit indeed occur.
Lloyds shares fall again
Britain’s banks are leading the FTSE 100 lower in end-of-week trading. NatWest Group is the worst-performing of these shares on Friday and down more than 6% as we virtually go to print. Barclays is 3.3% lower, while the Lloyds share price has reversed in excess of 4% from Thursday’s close.
It’s no surprise that these particular UK shares have tanked as signs of a Hard Brexit grow. Lloyds and NatWest source all but a fraction of profits directly from these shores. Okay, Barclays has exposure to the US to fall back on. But is still highly geared to the fortunes of the British economy.
All three FTSE 100 stocks face a miserable time if British and EU negotiators fail to avert a cliff-edge exit on 1 January, then. The boffins at KPMG reckon UK GDP will rise just 4.4% in 2021 if a no-deal Brexit transpires. This compares with a rise of 10.1% were the UK and EU to maintain existing trade links.
An economically painful Brexit is the last thing cyclical UK shares like Lloyds need given that a straightforward recovery from Covid-19 in 2021 isn’t exactly nailed down, either. And like the coronavirus, Brexit threatens to create significant economic trouble for Britain’s banks that could persist for years to come.
Sticking with other UK shares
A knock-on effect of a damaging Brexit is that the Bank of England will probably need to step in again to keep the economy on life support. Interest rates are already at record lows of 0.1% following fresh cuts in 2020. They might even dip into negative territory before too long, as major Bank of England policymakers have been publicly suggesting.
This provides another reason for Lloyds et al to worry. Low interest rates have taken a huge bite out of bank profits in the wake of the 2008–09 banking crisis. And things threaten to get worse on this front before they get better.
For these reasons I’m not tempted by the low Lloyds share price or those of its peers. Sure, Lloyds and Barclays trade on rock-bottom forward price-to-earnings ratios around 10 times. But these valuations reflect the colossal risks facing each of these FTSE 100 companies. I’d rather use my hard-earned cash to buy other UK shares today.
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.