2 reasons why I’ll avoid cheap Barclays shares in November!

Barclays shares look like a bona-fide bargain based on predicted earnings. But Royston Wild thinks the FTSE 100 bank remains a risk too far for him.

| More on:
Smart young brown businesswoman working from home on a laptop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Barclays (LSE:BARC) shares have risen an impressive 82% over the past year. They’ve jumped as markets have predicted a swathe of interest rate cuts that could boost lending activity.

Yet despite these gains, the FTSE 100 bank still looks dirt cheap on paper. It trades on a forward-looking price-to-earnings (P/E) ratio of 7.3 times.

It also has a price-to-earnings growth (PEG) multiple of 0.4. Any reading below 1 implies that a stock’s undervalued.

However, I’m not tempted to buy the banking giant for my portfolio. There are multiple threats I think could cause Barclays’ share price to erode again. Here are just two.

Motor finance scandal?

Trouble’s brewing for UK banks as the industry braces for another costly legal fight. This week saw “finance bosses, government officials and regulators” meet to discuss fears in the car finance industry over crushing financial penalties, according to the Financial Times.

The Financial Conduct Authority (FCA) is investigating whether secret commissions from banks to retailers resulted in unfair deals to consumers. It’s led to a sharp rise in customer complaints to the Financial Ombudsman.

The sense of gloom’s risen further in recent days, the Court of Appeal ruling that such commissions should have be approved by customers.

Lloyds has set aside £450m to cover possible costs, but has said it’s reviewing this amount following last week’s court ruling.

The Black Horse Bank is most exposed to the potential scandal. However, other banks like Barclays are also in danger of thumping penalties. Estimates differ, but Numis thinks motor finance providers could face a thumping £10bn bill.

It’s probably not as large as the infamous Personal Protection Insurance (PPI) saga. But this episode could still potentially take a big bite out of Barclays’ bottom line.

Poor growth outlook

Banks are some of the most economically sensitive companies out there. Periods of low growth result in reduced lending activity, higher loan delinquencies, and typically weaker margins due to lower interest rates.

Unfortunately, this is the backcloth Barclays will likely be forced to navigate in the years ahead. This week, the Office for Budget Responsibility (OBR) predicts that — after peaking at 2% in 2025 — GDP growth will fall thereafter, hitting 1.5% in 2027 and 2028. Estimates beyond next year were actually cut by the OBR.

Added to the possibility of a US recession — which JP Morgan recently apportioned odds of ‘1 in 3’ — Barclays could struggle over the rest of the decade, perhaps longer.

Emerging market banks like HSBC and Standard Chartered face dangers of their own. More specifically, a prolonged slowdown in China’s economy, and especially fresh shocks for the country’s property sector, pose a large threat.

But the opportunities for superior long-term returns (through share price gains and dividend growth) make these more attractive to me than Barclays. Their Asian and African markets are tipped to expand strongly due to themes including rapid population growth, improving consumer wealth and ongoing urbanisation.

Like Barclays, these businesses also trade on attractive P/E ratios. These are 7.5 times and 7.2 times for Standard Chartered and HSBC respectively.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »