Lloyds’ share price has taken a beating following last week’s market rout. The Bank of England's emergency measures and the government’s big-spending budget gave the share price the briefest of lifts. Yet a combination of mixed-messages from policy makers and fears over the scale of the outbreak saw the worst week of trading in over three decades.
Against this background, how should investors trade the Lloyds [LLOY] share price?
What's happening with Lloyds’ share price?
Since the start of the year, Lloyds’ share price has dropped over 47% as investors hit the sell button following the coronavirus outbreak. As a bellwether of the UK economy, Lloyds could be in for more sharp drops as the full impact of the virus on the economy becomes clear.
How will the measures help Lloyds?
The Bank of England's Monetary Policy Committee (MPC) cut interest rates in half to a historic low of 0.25%. It also freed up an additional £190 billion for banks to lend. Mark Carney said that the measures would equate to 1% of GDP.
According to Interactive Investor, the £190 billion works out to 13 times banks' net lending to business in 2019. Such amounts should help Lloyds continue to lend and provide a buffer if customers affected by the virus struggle to repay loans.
Together with Chancellor of the Exchequer Rishi Sunak’s budget promise to boost infrastructure investment to £600bn over the five-year Parliament, the measures should help to stimulate the UK economy.
Analysts at UBS said: “As the MPC suggests in its statement, the Covid-19 impact – while potentially very large and sharp – is expected to be temporary, and the ability of the economy to reaccelerate once the coming headwinds start to abate will clearly be strengthened by the support provided by the MPC, and likely the Government, today.”
“As the MPC suggests in its statement, the Covid-19 impact – while potentially very large and sharp – is expected to be temporary, and the ability of the economy to reaccelerate once the coming headwinds start to abate will clearly be strengthened by the support provided by the MPC, and likely the Government, today” - UBS analysts
What are the challenges?
Boris Johnson has called the coronavirus the biggest public health issue for a generation. Major disruption to the UK economy is a near certainty and Lloyds’ mortgage and credit operations could be hit - not least from a spike in bad loans.
Then there’s the existing issues the UK economy is already facing. Deutsche Bank said in a recent report that economic growth in Britain this year could be a mere 0.5%.
Deutsche Bank's prediction for Britain's economic growth this year
So have the measures helped Lloyds’ share price?
Not yet. On the day they came out, Lloyds’ share price shot up over 3%. However, 24 hours later the share price had plummeted over 10% as global indices experienced their worst trading day since Black Monday in 1987. According to Nomura analyst Masanari Takada, investors are now bracing themselves for a worst-case scenario, including a global recession.
Chancellor Sunak’s budget announcement that 2020 growth is likely to come in at 1.1% - its worst level since 2009 - won’t have helped investor confidence. And this doesn’t take into account the damage Covid-19 will do to the economy.
What’s the long-term outlook for Lloyds’ share price?
With unprecedented levels of volatility in the markets, including some of the worst selloffs ever seen, Lloyds’ share price is likely to continue to be under pressure. If a global recession really does happen then Lloyds’ status as a bellwether for the UK economy could see its share price and hefty dividend wiped out.
|PE ratio (TTM)||9.72|
|Quarterly Revenue Growth (YoY)||5.90%|
Lloyds share price vitals, Yahoo Finance, 18 March 2020
Brexit - an issue that dogged Lloyds last year - is still out there with the UK has yet to make a deal with the EU on the practicalities of withdrawing. Negotiations are likely to be fraught, especially as the UK and EU nations scramble to minimise the damage from the coronavirus.
Still Lloyds carries an average 75.37p 12-month share price target. Hitting this would represent a 115% upside on the current share price. Whether this is realistic given what’s happening in the markets remains to be seen. There’s every possibility that we will see analysts revise their targets once the full-extent of the damage is known.
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