For a brief moment in March, Lloyds’ [LLOY] share price looked like it was going to rally. With the stock battered by the coronavirus outbreak, hope came in March as the Bank of England announced that a V-shaped recovery was a possibility.
As a bellwether of the UK economy, Lloyds’ share price started to climb. That lasted a matter of days. Since 26 March, the share price has slipped a further 22% to trade fractionally above its 52-week low.
Yet for bargain hunting traders, now could be the time to fill their boots. Especially if the tentative steps to reopen the economy offset the worst of the coronavirus’s economic damage, and boost Lloyds’ share price as a result.
Lloyds’ share price and a U or L shaped recovery
Lloyds’ share price is now languishing near its mid-March lows and talk of a V-shaped recovery has moved to a U, or even L shape. While this might sound like economics mumbo-jumbo, neither is good news for the UK economy - or Lloyds.
A U-shaped recovery would see a sharp drop in key economic indicators like GDP, employment numbers and industrial output. These would remain depressed for a couple of years before a sharp rebound. An L-shaped recovery sees that same decline but the rebound would take years, if not a decade, to come about. And if either happens, then Lloyds’ share price could remain depressed for some time to come.
In Q1 earnings, Lloyds provided its own economic scenarios for a post-coronavirus UK economy. The best case would see the economy bouncing back next year with Lloyds’ credit losses coming at almost £5 billion.
But since then a flurry of depressing economic data has come in, including news that UK GDP contracted 2% in the first three months of the year. This has increased talk of the longer, flatter, U-shaped recovery taking place.
“Talk of a V-shaped recovery feels like wishful thinking, and we expect prolonged periods of depressed growth across the majority of the economy. A flatter, U-shaped recovery is more likely,” Stefan Koopman, an economist at Rabobank, told Investor Magazine.
Then there’s the dreaded L shaped recovery. Think Japan's lost decade in the 90s or the aftermath of the 2008 financial crash. A long economic depression, which would likely put further pressure on Lloyds’ already battered share price.
“Talk of a V-shaped recovery feels like wishful thinking, and we expect prolonged periods of depressed growth across the majority of the economy. A flatter, U-shaped recovery is more likely” - Stefan Koopman, economist at Rabobank
Is a U or L-shaped recovery inevitable
Despite the job losses and impact on businesses, the majority of people are still in work. During lockdown many people will have saved up money which they could then spend once the lockdown is over, helping to revive the UK economy.
The government’s decision to extend its furlough-scheme until October should also help reduce unemployment numbers. Of course, this extension may only have delayed the inevitable.
Even if it does help reduce job losses, the money still needs to be put back in the treasury kitty somehow. It's estimated that the scheme is costing the government £12 billion a month. Along with raising money through loans, some of the measures the treasury is considering include tax hikes. This could hit consumer spending.
Estimated monthly cost to government
So, is Lloyds’ share price really a bargain?
In spite of everything, analysts appear somewhat hopeful about Lloyds’ future. Back in March, HSBC analyst Robin Down upgraded Lloyds from a Hold to Buy, arguing that the coronavirus should be "short-lasting" - although Down also trimmed his share price target on Lloyds from 55p to 48p.
Among other analysts, Lloyds’ share price still carries a 42p average 12-month target on the Financial Times. Hitting this would see a 41% upside on the current share price. If Lloyds managed to get back to its 52-week high of 73.66p, that would see a 147% upside on the current share price.
That's a big ‘if’ and depends on the lasting impact of the coronavirus on the UK economy. Even if the economy manages to avoid a depression, the recovery might see a nervy start.
HSBC’s Head of Global Foreign Exchange Strategy David Bloom told CNBC that the economy is likely to see a U-shaped recovery with a “jagged bottom” and “multiple false dawns” as countries come out of lockdown.
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