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Lloyds’ share price: The battle of the hedge funds

Lloyds’ share price: The battle of the hedge funds

Lloyds’ [LLOY] share price has more than halved this year as the coronavirus wreaks havoc.

Major hedge funds are currently fighting over the direction Lloyds’ share price is likely to take now. In one corner, are suggestions that the share price will drop even further, despite already trading near its all-time lows. In the other corner are hedge funds and banks that believe Lloyds will get over its current headwinds. 



The bears on Lloyds’ share price

Betting against Lloyds’ share price is hedge fund Marshall Wace with a £100m short position. This is the biggest bet against the bank since disclosure rules were introduced, suggesting Marshall Wace is confident that Lloyds’ share price will continue to fall. Headwinds for Lloyds include the coronavirus, the state of the UK economy and Brexit — a seemingly perfect storm that could upend the stock and see the bears laughing all the way to the bank.

What makes Lloyds’ share price vulnerable is its focus on the UK retail market. This means that the stock is sensitive to macroeconomic events that are outside of its control. Just take last week’s bruising news flow. 


Valuation of hedge fund Marshall Wace's short position


At the start of the week, Lloyds’ share price dropped following the turmoil surrounding the UK government’s Internal Market bill. The bill caused a resurgence in fears that the UK would leave the EU without a deal, hurting the UK economy. Midweek saw news that the Bank of England might be seriously considering cutting its interest rates below zero, which would hurt Lloyds’ lending business.

At the end of the week, that maelstrom was kicked off the front pages by fears of further lockdown measures being imposed. All this led to Lloyds’ share price closing at 25.24p, with many investors probably thinking the bears are onto something.

Goldman Sachs also rates Lloyds a Sell. In its analysis, Sachs reckons Lloyds is susceptible to mounting unemployment in the UK and the end of coronavirus support measures, which could result in a spike of bad debt. It has lowered its earnings estimate on the bank by 3% to 7% and cut its price target to 27p.


The bulls on Lloyds’ share price

Despite Marshall Wace's big bet, Lloyds’ share price has its supporters. Among the bulls is Harris Associates, which has taken a 7% stake in Lloyds — making it the bank's biggest investor. According to David Herro, vice-chairman of Harris Associates, “the bank is in great shape and extremely well-capitalised”.

The robustness of Lloyds’ business is certainly a factor for the bulls.  The bank has strong capital levels and the vast majority of its loan book is secured against property with high loan to value ratios. It has also set aside £3.8bn to cover 80% of expected bad loans, so impairments might not figure so heavily in future quarterly earnings.


Amount Lloyds set aside to cover expected bad loans


Also in Lloyds’ top ten investors are Longview, Artisan and Mondrian, specialist investment boutiques that the Financial Times' Patrick Jenkins said represent "a marked shift away from mainstream asset managers as the riskiness of Lloyds’ prospects has mounted". As Jenkins points out, these boutiques have replaced established players like Lansdown Partners whose flagship fund gained a mere 1% in last year's bull market, in part due to long positions held on Lloyds. 


What does this mean for Lloyds' share price?

The picture looks bleak for Lloyds' share price in the short-term — just last week the stock fell below 26p a share to hit a 52-week low. However, if the UK economy is able to get past its two big hurdles right now — the coronavirus and Brexit — then there could be hope on the horizon.

“If there is a vaccine or a Brexit deal or both,” said Harris Associates partner Jason Long, “then suddenly the outlook for the UK economy doesn’t look so bleak.”

“If there is a vaccine or a Brexit deal or both, then suddenly the outlook for the UK economy doesn’t look so bleak” - Harris Associates partner Jason Long


Among the analysts tracking the stock on the Financial Times, Lloyds' share price carries an average 38p target. Hitting this would see a 58.5% upside on the current share price.

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