Things are looking particularly sticky for the UK economy right now. Britain’s heavy reliance on the services sector meant it was the worst hit of all developed economies in 2020 as coronavirus lockdowns were introduced. It looks like another year of pain is in store then, as more restrictions are imposed. This casts a cloud over many UK shares reliant on a strong domestic economy.
A report by GlobalData illustrates the difficulties facing the British economy in 2021. It says investors should expect “a rocky road to recovery in 2021” as the new Covid-19 strain hits travel and forces further lockdowns. Trade disruption linked to Brexit is likely to hit gross domestic product (GDP) too, it says.
Will the Lloyds share price fall?
With the bounceback having stalled during the autumn, the organisation says “it is already doubtful that the country can achieve the previously expected 5.46% recovery in 2021 and, based on the latest developments, [we’ve] revised down its GDP forecast for the UK to -11.3% in December 2021.”
Cyclical UK shares with a large stake in Britain still have plenty to worry about in the new year then. This includes FTSE 100 banking colossus Lloyds Banking Group (LSE: LLOY) of course. The Black Horse bank’s share price has stagnated around the mid-30p marker for the past couple of months. I fear that it could plunge to significant new lows before too long though.
Profits to suffer beyond 2021
Lloyds and its peers have stashed away fortunes to cover expected loan losses as the economy toils. In this case, provisions worth an eye-popping £4.1bn have been booked and more can be expected as the number of individuals and companies experiencing severe financial distress balloons.
Naturally, Lloyds shouldn’t expect revenues to spring higher in this environment either. The FTSE 100 bank saw total income slump 17% in the third quarter of 2020 to £10.8bn, latest financials showed.
Moreover, this UK share can expect margins to remain under pressure long beyond 2021. That’s because the Bank of England will likely need to keep interest rates locked around their current record lows to aid the economic recovery.
I’d buy other UK shares instead
There’s a lot to like about Lloyds on paper. City analysts reckon annual earnings here will soar 133% in 2021. This leaves the firm trading on an undemanding forward price-to-earnings (P/E) ratio of 12 times. Moreover, expectations of a lift in yearly dividends creates a 4.7% dividend yield for UK share investors to get their teeth stuck into.
The strong chance of earnings and dividend estimates being blown off course mean I won’t be buying Lloyds however. There are plenty of top UK shares that should thrive in 2021, irrespective of the outlook for the British (and indeed global economies).
And The Motley Fool’s huge library of free and exclusive reports can help investors to dig these out.
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.