Lloyds' [LLOY] share price has taken a battering this year, but that hasn't stopped one of the biggest hedge funds in Europe betting it could sink further. In a recent filing, Marshall Wace revealed a 0.51% short position on Lloyds’ share price worth around £100m — the biggest bet against the bank since disclosure rules were introduced in 2012.
What makes Marshall Wace's position interesting is that the majority of City analysts back Lloyds’ share price. The position doesn't reflect Marshall Wace's overall position on the economy either, with a source close to the fund telling the Financial Times that the fund manager expects UK stocks to rise overall.
While Marshall Wace hasn’t commented publicly on why it’s shorting Lloyds, it’s possible that they believe the coronavirus, the UK economy and Brexit have created a perfect storm which will see Lloyds’ share price continue to slide.
However, there’s the counter argument that once the storm clears the stock will rebound, making the current level of Lloyds’ share price something of a bargain.
The case for shorting Lloyds’ share price
Lloyds’ share price is seen as a bellwether of the UK economy and, as the economy has been ravaged by the coronavirus pandemic, it's no surprise to see the stock down over 50% this year. The UK is now in a deep recession, with the economy shrinking 20.4% in the first three months of the year. While there have been signs of a recovery over the summer, the Bank of England expects this to slow considerably in the third quarter, which will put Lloyds’ share price under more pressure.
Unlike Barclays with its investment banking division, or HSBC's dominance in Asia, Lloyds is almost solely focused on the UK retail market. This was brought into sharp focus during half-year results which saw the bank post a £676m pre-tax loss, with revenues sliding 21% to come in at £3.5m. An eye-watering additional £2.4bn was set aside to cover any spike in bad loans triggered by the outbreak, bringing the total to £3.8bn.
Lloyds' half-year posted revenue - a 21% decline
Also on the horizon is the end of the government’s furlough scheme, which could trigger a spike in unemployment rates and a rise in loan defaults. Given that Lloyds is the UK's biggest mortgage lender, the impact of this scenario could see its share price fall even further. Not helping profits from Lloyds’ lending businesses are interest rates at historic lows, with little sign of a rise any time soon.
The case for backing Lloyds’ share price
Marshall Wace’s downbeat assessment of Lloyds’ future stands in contrast to others. Of the 23 analysts tracking the stock on the Financial Times, 5 have a Buy rating and 10 rate it an Outperform. Hitting the average analyst 12-month price target of 38p would see Lloyds’ share price gain 41% (as of 7 September’s close).
On the economic front, there are clearly hard times ahead for the UK. However, optimists will be hoping the worst of it could be behind us. June’s GDP figures revealed an 8.7% month-on-month increase as an easing of lockdown measures saw consumers beginning to spend again.
However, a return to pre-pandemic levels is unlikely to happen until 2021 at the earliest, according to Bank of England forecasts. While this is a slower recovery than previously predicted, at least the central bank expects the economy to rebound in the not-too-distant future.
Strategically, there’s talk of Lloyds diversifying further into wealth management. The bank has already partnered with Schroders to launch Schroders Personal Wealth, which saw net new business of £42.7bn in the first half of the year. If initiatives like this meaningfully add to the bottom line, Lloyds’ share price should become more resilient to macroeconomic events beyond its control.
Valuation of Schroders Personal Wealth's net new business in first half of year
At the end of the day, Lloyds is a profitable bank, with strong cash reserves and a market-leading position in the UK. For bargain hunters with the stomach for some volatility, now could be the time to buy. However, for those looking for short-term profits, it could very well be a case of betting against the bank.