Lloyds Banking Group (LSE: LLOY) has been on a fresh tear higher in recent sessions. Another mid-single-digit-percentage rise on Wednesday has taken the FTSE 100 bank to its most expensive level for five weeks, at around 33.5p per share. It’s an ascent that seems to defy some of the unsettling newsflow that’s continued coming during the past few days.
The biggest near-term threat to Lloyds’s profits stems from the Covid-19 outbreak, of course. But investors need to be wary of the implications that the crisis will have on Bank of England monetary policy. Interest rates are currently at record lows of 0.1% but signs are growing that they could be cut further still.
Fresh Brexit fears for Lloyds
Comments concerning interest rates aren’t the only worrying things to come out of Threadneedle Street of late. It seems a lifetime ago that fears of an economically catastrophic Brexit were damaging profits over at Lloyds and its peers. Reports overnight show that the Bank of England remains concerned about the consequences of a ‘no deal’ withdrawal from the European Union at the end of 2020.
According to Sky News, the head of the central bank, Andrew Bailey, called the CEOs of Lloyds, Barclays, HSBC, and RBS to tell them to accelerate their planning for a UK departure on World Trade Organisation (WTO) terms. It goes without saying that such a scenario would likely reinforce the need for interest rates to remain at rock-bottom levels, too.
The move from Bailey isn’t a surprise given the steady stream of noise from the government on the obstacles to reaching a deal. Just yesterday a Downing Street spokesman described a compromise between London and Brussels on fishing rights and standards as “wishful thinking”.
Box clever with this Footsie stock
The risks to Lloyds’s bottom line are considerable and many, then. And they are problems that threaten to overshadow its performance all through this new decade and potentially thereafter. This is why I for one won’t be buying the Footsie bank’s shares despite its undemanding valuation. It currently trades on a price-to-earnings (P/E) ratio of 15 times.
There is no shortage of other cheap shares to snap up from Britain’s premier share index. So why take a chance with risk-loaded Lloyds? Take packaging manufacturer DS Smith (LSE: SMDS) as an example. I own this share myself because of its multiple long-term growth levers: its expertise in the exploding e-commerce segment; its recent entry into the US and its presence in fast-growing European emerging markets; and its expanding role in the sphere of recyclables.
Yet despite this DS Smith commands a lower rating than Lloyds. Its forward P/E multiple comes in at 13 times, based on recent prices of 350p per share, suggesting that there is some real value to be had here. But it’s by no means the only blue chip that offers better value than the battered banking giant.
