The standout FTSE 100 stock in 2023 so far has been Rolls-Royce. Indeed, after surging more than 170%, it’s the best performing stock in Europe this year. Could Lloyds (LSE: LLOY) shares do something similar in 2024?
Well, Morgan Stanley just laid out a bull case scenario that sees the lender’s share price almost doubling to 85p. So it’s not totally far-fetched, despite the wretched share price performance over recent years.
But I reckon three key things would need to happen.
The UK economy
First, for better or worse (normally the latter in recent years), domestic-focused Lloyds is inextricably linked to the health of the UK economy. It is the largest mortgage lender here and doesn’t have a large international investment arm.
So, to boost the share price, the UK economy will probably have to surprise to the upside moving forward.
But what’s the chances of that happening?
Well, the Organisation for Economic Co-operation and Development (OECD) sees the UK’s national output rising by 0.7% in 2024. A few months ago, it was anticipating growth of 1%.
Such gloomy forecasts have prompted the Bank of England governor, Andrew Bailey, to say that the outlook for the British economy is the worst he’s ever seen.
So that’s not ideal.
Then again, economic forecasts aren’t always accurate. As Warren Buffett said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future“.
The optimal zone
A second key thing relates to the so-called ‘Goldilocks zone’.
In astronomy, this is the area around a star where it is not too hot and not too cold for liquid water to exist on the surface of nearby planets. These conditions could potentially be suitable to sustain life.
In the case of Lloyds, it’s when the stars align and interest rates are around 2%-3%. These conditions could potentially be suitable to breath life into the Lloyds share price.
Specifically, it would mean net interest margins — the difference between what banks charge borrowers and pay savers — remain high enough to generate nice profits while impairment charges become less of a concern.
Any move towards this could be a big catalyst for the shares.
However, Andrew Bailey (him again!) just said interest rates won’t be cut for the “foreseeable future“.
Bank raid
Another thing that might be weighing on the shares is the threat of a windfall tax on UK banks. Some have accused the sector of profiteering from higher rates.
In Europe, this has already started happening. Italy, for example, slapped a shock 40% tax on banks back in August.
I think a potential government raid on bank profits is a risk. Confirmation this won’t happen could improve investor sentiment.
The pick of 2024?
So, I think these things would need to happen for Lloyds shares to do a Rolls-Royce in 2024.
Are they likely? Probably not, I’d say.
However, that doesn’t mean that the shares won’t still perform well. In fact, I recently bought some myself, mainly due to the attractive forecast dividend yield of 7.3% for next year.
Plus, we may have reached (or may be near) peak pessimism regarding the UK economy. History suggests this is normally a good time to take a contrarian view and invest for the long term.
