Are UK banking shares presenting us with an opportunity or a warning?
Anyone watching the markets will have noticed the recent declines in UK banking shares after they’d risen in the past year. For example, at 484p, HSBC Holdings is down around 17% since February and up around 8% over the past year. At 45p, Lloyds Banking Group has also fallen by about 17% since February and is up by 10% over a year. And at 161p, Barclays is 18% lower since February and also down 7% over the past 12 months.
Bank stocks can be first-movers
The obvious catalyst for the recent falls was the escalation of hostilities in Ukraine And, in fairness, most banking stocks are showing strong bounces today as I write (10.30 am on Wednesday, 9 March). And I’d expect some bounce-back if the news flowing from Eastern Europe shows any signs of improvement in the situation. So, perhaps banking stocks are trying to tell us something now.
I see the possibility of de-escalation of violence in Ukraine as a potential positive short-term driver for bank shares. After all, banking stocks as a group are known to be among the first movers when it comes to impending changes in the macroeconomic and geopolitical landscape. They can be very responsive and first off the blocks.
But on the bear side of the equation, perhaps the big recent move lower in banking stocks is trying to signal longer-term economic trouble ahead. Commodity prices have shot up because of the situation in Eastern Europe. And that looks set to drive general price inflation even higher. But Inflation was already surging before the war because of the after-effects of the pandemic.
If inflation rises too much and too soon, it could choke off the world’s economic growth and ongoing recovery from the pandemic. And if we see another recession, I reckon banking stocks will be the first to indicate the possibility by moving lower.
A complex situation
However, higher inflation encourages central banks to raise base interest rates in an effort to fight rising prices. And that sometimes works because higher interest rates can slow down economic activity and thus apply a braking force to inflation. Meanwhile, higher interest rates can be good for the profits of banking businesses — but not if higher rates cause a general economic slump!
The situation is complex and almost impossible to reliably predict. But I do know that banking stocks are perhaps the most cyclical shares in which we can invest. Looking at most banks’ 20-year financial and trading records reveals see-sawing share prices, fluctuating profits and famine-or-feast shareholder dividend payments.
And for that reason, I’d never try to make a bank stock a long-term holding in my portfolio. The most likely outcome of an approach like that, I feel, would be regular visits back to my starting point. However, it’s worth me investing in bank shares on a shorter-term basis to catch the up-legs in each cycle. However, timing investments like that is fraught with difficulty. And I’m having such difficulty right now!
That said, I’d be inclined to become interested in researching bank stocks when their share prices present us with a low point in their cycles. Perhaps that moment is now.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.