Brexit surprised us all as far as stock markets are concerned and the reaction of investors to Donald Trump’s victory has done it again. Despite an initial period of uncertainty, market sentiment has remained more buoyant than expected or predicted. For example, shares in Lloyds (LSE: LLOY) have risen by as much as 7% following Trump’s victory. Could this mean that they might finally be back on their way to 100p?
Of course, they’ve got some way to go. The last time Lloyds traded at 100p per share was in 2009. Since then, the bank has been through a challenging period but has emerged from it in a stronger position. Its asset disposals, job cuts and an ability to generate efficiencies has meant that Lloyds is a relatively lean and profitable bank that has a bright future. But its shares still ended last week at under 60p. Although the government remains a shareholder, Lloyds is now back to full financial health and is capable of withstanding a difficult economic period so maybe the shares won’t stay that low for long.
Or is that too optimistic? Possibly. Economic challenges look set to be a feature of the coming years. Donald Trump’s victory has caused a period of uncertainty that could continue over the medium term. His protectionist rhetoric during the campaign could, if such policies are implemented, cause an economic slowdown for the global economy. This would negatively impact the UK economy and could mean that Lloyds’ share price declines, since its performance is closely linked to that of the wider UK economy.
Don’t forget Brexit
In addition to the risk from Trump’s policies, Lloyds must contend with the risks from Brexit. Negotiations are expected to start by the end of March 2017 and the UK is due to leave the EU two years later. During this time, confidence in the UK economy could come under pressure and this may lead to worsening investor sentiment towards Lloyds. Therefore, investors should seek out a wide margin of safety before buying a slice of the bank.
Encouragingly, Lloyds offers excellent value for money at the present time. Its forward price-to-earnings (P/E) ratio of 8.9 takes into account the current forecasts for a decline in earnings of 16% this year and 8% next year. Even if Lloyds’ performance is worse than anticipated, its wide margin of safety means that its shares may not be hit as hard as the wider market.
Furthermore, the bank offers upside potential and even if it reached 100p per share, it would trade on a still reasonable P/E ratio of 15.2. And with a yield of 5.3%, it has income appeal at a time when many investors are concerned about low interest rates and increasing inflation.
Therefore, Lloyds has the scope to rise to 100p over the medium term. However, this would require a pragmatic rather than populist Trump administration. At this stage, it’s unclear what type of national and global leader Trump will ultimately end up being. However, with Lloyds having a low valuation and wide margin of safety, it seems to be well-prepared for difficulties arising from hid policies and from the potential challenges associated with Brexit. As such, for long-term investors, it remains a sound buy.
