Since Halloween, UK shares have enjoyed a healthy uplift. On 30 October, the FTSE 100 index was very depressed, closing at 5,577.30 points. On Friday, the index closed at 7,019.53. That’s an increase of roughly 1,440 points — more than a quarter (25.9%). This has been one of the best share surges in many a year. Furthermore, share prices of Barclays (LSE: BARC) and other UK banks have surged strongly, as investors rotate from momentum stocks into value shares. Even so, I’m hopeful that the Barclays share price has further to go. Here’s why.
The share price doubled since September
In September, the Barclays share price was looking sickly. It had been 91.01p a year ago but then started to climb to over 131p. However, it fell steeply from June and closed at 91.55p by 25 September. From July to October, I repeatedly argued that Barclays shares were very undervalued and a bargain in my book. On Friday, the shares closed at 189.76p. That’s more than double (+107.3%) their September low. However, even though the shares are worth twice what they were, I see two trends to boost them yet higher.
US banks report huge profits
For clues as to the immediate future of the Barclays share price, I’m looking westwards, because the US earnings season is already underway. Some of the S&P 500 index’s biggest companies reported bumper profits this week, as earnings rebound from 2020’s lows. Some of the biggest blowouts came from banks including JPMorgan Chase, Bank of America and Goldman Sachs. These Goliaths of US banking reported huge increases in earnings, largely due to two factors. First, banks are reversing the huge reserves set aside in 2020 for loan losses, adding billions of dollars to their bottom lines. Second, investment banks (especially Goldman) generated huge profits from their trading and advisory functions.
Barclays’ earnings could bounce higher…or lower!
What does this have to do with the Barclays share price? The 330-year-old lender is the only UK-focused bank to have a sizeable investment-banking division. In 2020, corporate and investment banking contributed £2.6bn to profits. Alas, Lloyds Banking Group and NatWest have closed their investment banks. HSBC Holdings is big in investment banking, but it’s a global giant with limited UK exposure. Thus, if the trends seen in US investment banking are repeated at Barclays, even modestly, then the bank’s earnings could leap.
In addition, Barclays set aside £4.8bn in 2020 to meet expected loan losses. Thanks to gargantuan government support and central-bank largesse, British borrowers and businesses are in much better shape than was predicted a year ago. Hence, Barclays should be able to reclaim some of these reserves to drop straight into its bottom-line profit. If this happens, then it could stimulate the Barclays share price.
Of course, I could be wrong. What if the widely expected multi-year global economic boom fails to materialise? Or this investment-banking boom is a short-term boost that fades away? What if loan losses rise when government support ends and unemployment soars as weak companies collapse? Or growth reverses after government stimulus ends? And what if new, more virulent variants of Covid-19 take hold? If bank earnings do decline in these scenarios, then the Barclays share price could suffer.
But weighing up the risks, I’d still buy Barclays shares today to tuck away for the long term!
Cliffdarcy 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.