Can Lloyds shares bounce back while the pandemic continues?
The Lloyds share price has dramatically declined in recent weeks, with the pandemic plunging markets into chaos. Can the stock recover before the year ends?
Banks' shares have performed poorly during the opening months of 2020, an unavoidable consequence of the Covid-19 pandemic pushing the global economy to the brink of recession. Lloyds Banking Group stock shed around half of its value in the opening quarter of the calendar year, a 49% fall in three months that took its share price from 62.5p to 32p.
The sharp falls in Lloyds stock were representative of wider trends on the FTSE 100, with the index crashing in March as investors scrambled to react to the social and economic changes caused by the pandemic. The FTSE 100 posted its second-largest daily fall on 12 March, plunging by 10.9% in a day of trading that evoked comparisons with the 2008 financial crisis.
The FTSE 100 clawed back some of those losses at the end of March and start of April, although future volatility is anticipated. While the FTSE 100's bleakest outlook came in mid-March, Lloyds’ share price reached its lowest ebb of the year in the opening days of April.
Pandemic and recession spells bad news for Lloyds share prices
The threat of a recession played a significant role in driving down Lloyds' share price. Any scenario where unemployment rises and consumer spending falls is bad news for a bank, but a recession incited by a pandemic poses an even tougher threat.
There is no telling how long coronavirus will be the dominant influence on both domestic and global economic matters. An inability to plan for the future increases the likelihood of bad debts, thereby undercutting a bank's revenue.
The suspension of dividends also hit Lloyds shares hard, with all of the UK's major lenders waiving shareholder payouts for the foreseeable future at the behest of the Bank of England. This immediately diminished traders' confidence in Lloyds stock, with its share price posting a 12% drop as investors reacted to the news about dividends on 1 April.
Lloyds shares continue to fall, but is there an end in sight?
The decision to hold off on dividends until the end of 2020 provides a degree of certainty for investors, while Lloyds may eventually reap the benefits of forced preservation of its capital. That bodes well for the Lloyds share price in the longer term, but is there any cause for optimism in the coming weeks?
A trader could embrace the idea that the only way is up, given that Lloyds shares have come out the other side of a FTSE 100 crash and a dividend suspension, but the extreme unpredictability of the coronavirus spread makes this a dangerous perspective.
There are very few industries that will end the pandemic in a strong economic position, although Lloyds is better placed than many FTSE 100 companies to weather the storm. The bank posted pre-tax profits of £4.4 billion in 2019, with £2.45 billion spent on payment protection insurance (PPI) claim settlements inhibiting Lloyds' revenue growth.
Those 2019 profits actually marked a 26% decrease from the previous year, but PPI payments have now been concluded. This frees up more capital to combat the effects of coronavirus in 2020, while Lloyds has the benefit of being able to conduct business in some fashion during the pandemic.
Any investors or traders that buy Lloyds stock in the coming weeks should do so with an acceptance that big short-term gains might be off the table. Instead, they will be hopeful that they have gained exposure to a high-performing stock once the UK economy returns to relative normality. That could be some way down the line, while new developments in the pandemic could derail economic growth projections at any moment.
How to take a position on Lloyds shares rising or falling
What do you make of Lloyds’ struggles? Will there be a bounce, or could the shares reach new lows?
With IG, you can trade on the world’s best trading platform and back Lloyds shares rising or falling. Go long (buy) if you think Lloyds stock will increase in value, or go short (sell) if you think Lloyds shares will decrease.
To take a position, follow these simple steps:
- Create an IG trading account or log in to your existing account
- Type ’Lloyds’ or ‘LLOY’ in the search bar and select it
- Choose your position size
- Click on ‘buy’ or ‘sell’ in the deal ticket
- Confirm the trade
You can also buy and hold Lloyds shares with IG’s share dealing service. Commission on UK shares is £3 if you’ve traded three or more times in the previous month, or just £8 otherwise.
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