Lloyds’ [LLOY] share price has had something of a rollercoaster ride over the past couple of weeks. Two weeks ago, the stock was enjoying a sharp rally as news of a coronavirus vaccine gave hope that the worst was behind us. That helped Lloyds’ share price break through 30p — a level it's been trapped below for much of the year.
Like any rollercoaster, what goes up must come down. Spoiling Lloyds' share price rally was last week's bleak outlook for the UK economy in the months ahead. The UK chancellor, Rishi Sunak, warned of an unprecedented “economic headache”, with the expectations of lost jobs and a freeze on public sector pay.
The news saw Lloyds' share price rally top out last Thursday, with the stock falling 2.2% to 36.56p on the day — one thrill ride that Lloyds' small army of shareholders could have done without. Lloyds wasn’t the only UK bank to suffer; Barclays [BARC], HSBC [HSBA] and NatWest Group [NWG] all saw similar falls.
That said, Lloyds’ share price managed to claw back some losses to close last week at 37.29p. Does this show investors are confident that the stock is on the up once again, or will pessimism around the economy erode confidence?
Why did the spending review hit Lloyds’ share price?
Lloyds’ share price is widely considered a bellwether of the UK economy. That means any negative economic data is likely to inject volatility in the stock.
Lloyds proved this in spades last Thursday when UK Chancellor Rishi Sunak warned that the UK’s “economic emergency has only just begun”. In his spending review, Sunak revealed that government borrowing in 2020 to 2021 is set to be the highest in peacetime at £394bn.
A stark set of forecasts from the Office for Budgetary Responsibility (OBR), published along with the spending review, spelled out the expected damage from the pandemic. According to the OBR Gross Domestic Product will contract 11.3% this year — its greatest contraction in 300 years. The watchdog’s central forecast would see a double-dip recession in the final quarter of 2021. In each forecast, the economic damage is predicted to manifest itself in lower incomes and a rise in unemployment, with 7.5% of the population out of work in the second quarter of 2021.
OBR's unemployment prediction for Q2 2021
Sunak kept quiet on the economic impact of Brexit. However, the OBR hasn’t been as circumspect. Output would be further hit if the UK fails to strike a trade agreement with the EU before the end of the year. If the UK reverts to World Trade Organisation terms at the start of 2021, it predicts GDP would drop by a further 2%. According to the OBR, Brexit will hit different parts of the economy, but its long-term damage could rival that of the coronavirus.
With only five weeks to ratify an agreement, time is running out and the two parties are still stuck on significant differences.
Where next for Lloyds’ share price?
Despite the dire economic outlook, Lloyds’ share price has proven resilient. Last week, the stock finished up over 4%, despite Wednesday’s selloff. By Friday morning, the worst of it seemed to be over, with the stock gaining 1.8% on the day.
While the UK economy is clearly facing tough times, if a trade deal with the EU emerges in the next few weeks then Lloyds’ share price should rally — although investors will have to brace for some volatility until then.
That said, fears about the impact of Brexit on Lloyds’ share price could be overplayed. While the stock fell after the referendum in June 2016, it still managed to recoup some losses to close that year at 63.76p.
It’s also worth remembering that Lloyds’ share price is still down 44.09% this year to 30 November. Some of the negativity surrounding the coronavirus will already be priced into the stock. While the OBR's outlook is dire, it’s now out there and the stock hasn’t fallen off a cliff. If a vaccine rollout takes place next year, along with a Brexit resolution, then two of the biggest weights on Lloyds’ share price will be removed. It will also no longer have to contend with PPI claims, which all but wiped out profits in 2019.
Among the analysts tracking the stock on the Financial Times, Lloyds has a 37p average price target, which would see a 3.7% upside on the current share price (as of 30 November’s close). The most bullish target is 45p, which would see a healthy 20.8% upside on the current share price.
|PE ratio (TTM)||37.42|
|Quarterly revenue growth (YoY)||-18.80%|
Lloyds' share price vitals, Yahoo Finance, 1 December 2020