What has been remarkable about Britain after last week’s referendum vote is that, after the initial shock and confusion, an air of calmness has descended over the country. People have just been getting on with their jobs, and for many it has been business as usual.
And can you believe it, the FTSE 100 has been rising, and not falling? A tumbling pound will be good for the economy, particularly exporters, and along with the likelihood that either interest rates will be cut or QE reintroduced, has boosted the stock market.
Poor earnings hinders the banks
But some shares have still been falling. Among the companies that have been most hit by the Brexit decision have been the banks. Barclays (LSE:BARC) has slid from 180p to 140p over the past month. And Lloyds Banking Group (LSE:LLOY) has gone from 70p to 54p.
If the broader market has stood up to the trauma impressively, why have the banks been falling? Well, many FTSE 100 companies are primarily overseas-based, and so are little affected by Brexit. But these banks operate almost entirely in the UK, and are dependent on the ups and downs of the British economy.
And the thing that has made me still cautious about firms like Barclays and Lloyds is the lack of trailing earnings. In the past three years both businesses have been reporting losses or minimal profits. They’ve been hit by low interest rates and huge reputational damage that has led to a whole raft of fines and litigation.
Interest rates look set to stay low, and may even fall further, as the Governor of the Bank of England said yesterday. That means that retail banking profits are likely to stay low.
They just might be contrarian buys
What’s more, the resurgence in the housing market is likely to slow, though I think that fears that property prices will now fall are overblown, as low interest rates and mortgage rates, a booming economy and a still-growing population will put a floor on prices. I think that house prices will continue to rise, albeit more slowly.
The PPI scandal has taken a huge chunk out of the banking industry. With so many billions sucked out of the banks by PPI, this has turned into an industry in its own right. At some point this PPI industry will fade out, but bank profitability is still taking a hit from this.
Seen in perspective, I can understand why the valuations of Barclays and Lloyds have been on the slide. Yet the UK economy will, I suspect, prove to be remarkably resilient. People will still open accounts, launch businesses, and take out mortgages.
That’s why I think the dramatic share price falls of the past few days have been overdone. And brave contrarian investors might start to see these firms as buys. I think these stocks could bounce back from their lows, and if you’ve been considering adding these companies to your portfolio, this might just be the right time to invest. Just proceed with caution.
