Lloyds (LSE: LLOY) shares have been on an absolute tear since the year began, climbing 25% since 1 January. That means an investment of £10,000 on New Year’s Day would have brought in £2,500 in profit.
That’s a decent chunk of passive income for just over two months of investment. The same amount of money in a Lloyds savings account would have accrued only £57.50 in interest.
So what’s driving this rally and, more importantly, will it continue?
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Economic stability
Several factors may have contributed to Lloyds’ impressive run this year. Most notably, its recent financial performance has been strong, with £4.9bn in profit recorded in H1 2024. The growth has been attributed to high interest rates pushing up the bank’s net interest margins.
The UK housing market’s doing well, helping to grow the bank’s loan book as it focuses on mortgage lending. Cost-cutting measures are also a contributing factor that helped improve efficiency.
In the meantime, UK economic conditions have been relatively stable despite a tangible air of tension in global markets. Consumer spending has held up better than expected and fears of a deep recession have eased. This has led to a positive re-rating of UK banks, with Lloyds leading the charge.
Could US trade tariffs derail the momentum?
Right now, the main topic on everyone’s lips is US trade tariffs. There are concerns that US trade policies could disrupt global financial markets. The Trump administration’s recently introduced tariffs on foreign imports have ignited a wave of uncertainty and market volatility.
If these tariffs lead to a broader trade war, global economic growth could slow, potentially reducing demand for corporate lending and impacting UK banks.
While Lloyds has little direct exposure to international trade, its fortunes are tied to the broader UK economy. A global slowdown could weaken business confidence, impacting loan growth and profitability.
Additionally, if inflation picks up due to higher import costs, the Bank of England may be forced to keep interest rates higher for longer. This would put extra pressure on borrowers, potentially leading to a rise in loan defaults.
Global economic risks
Another major factor influencing banks is the economic downturn in China. The world’s second-largest economy has struggled with weak consumer demand, a property sector crisis, and declining industrial output.
This has already impacted European banks with significant Chinese exposure, such as HSBC and Standard Chartered. So far, this doesn’t appear to have bled into Lloyds but any global instability could impact the bank’s bottom line.
If China’s slowdown leads to a broader decline in global trade and investment, UK banks could see lower demand for financing and increased market volatility.
Still the best of the rest
Lloyds has outperformed all other major UK banks so far this year, including Barclays, HSBC and NatWest.
After one of its best years on record in 2024, Barclays has started the year slowly. With more diversified global operations, it’s faced difficulties in investment banking. Meanwhile, NatWest has struggled with leadership issues and HSBC is more exposed to the global economy, which has weighed on its performance.
So with its localised focus, Lloyds has sidestepped many recent issues, making it an attractive stock to consider as a possible safe haven in these tumultuous times.
