Chart of the week: The outlook for Lloyds Banking Group shares
After calling the market crash correctly, analyst John Burford updates his view on Lloyds.
9th March 2020 09:45
by John Burford from interactive investor
After calling the market crash correctly, analyst John Burford updates his view on Lloyds.
There has been a sudden sea change in stock markets
Is there any share out there that is proving immune to the coronavirus? While a human vaccine may be months away, a financial vaccine is unlikely to be discovered for months, if not years. The Fed’s pop-gun of an historic 50 basis-point (bps) rate cut last week provoked waves of selling – continued with force Monday morning - and that contrary action set the seal on the new bear market being unleashed. That misfire was no accident.
There is little doubt that fears over a possible pandemic to sweep the Western world are growing fast, and that is having a direct and immediate effect on economic activity. But the underlying motivation for selling is the sudden reversal of mood. Before, complacency. Now, fear. And that transformation last month was in the blink of an eye. Most investors missed it.
We have had virus pandemics before – and markets mostly recovered quickly. But not this time.
And with corporate (and personal) debt levels at record highs, any fears that the servicing of these massive debt loads will be in jeopardy will/are sending shivers down the backs of money managers – and private investors alike. So even a small reduction in cash flows would bring into focus the spectre of bond defaults and then bankruptcy for some firms with the inevitable domino effect on others. The Fed has shot its wad and is out of ammo.
But even with record low interest rates, under this scenario, many commercial firms may not be able to roll their debt into this low rate regime. Corporate debt yields are already rising (bonds falling) in an ominous foretaste of what is to come.
And in the firing line of the above scenario, the major banks are front and centre. They hold the mountains of loans as assets that are suddenly vulnerable to downgrades. The ratings agencies received massive criticism after the 2008 Credit Crunch for not moving earlier to downgrade many poorly performing CDOs (collateralized debt obligation). Dare they repeat that mistake this time?
The ‘bad’ loan book from the 2008 Credit Crunch bucket appears set to expand. To add to the banks’ woes, new loans are reaping miserly returns with margins are razor-thin.
Long-time readers will know I have been bearish on Lloyds Banking Group (LSE:LLOY) for a very long time. The last time I covered it was on 3 December 2018 and this was the short-range chart then:
Source: interactive investor Past performance is not a guide to future performance
This is what I wrote:
The bottom line: Lloyds remains in a bear trend with major US banks downgrading their European ‘colleagues’ with Deutsche Bank (XETRA:DBK) one of the hardest hit (it has problems of its own). Those bad loans they carry are set to get a whole lot worse.”
Note that I was mentioning the bad loans as a negative over a year ago. Of course, in the meantime, the final 2019 rally phase has taken all assets higher, but that was the opportunity to re-assess investment strategies and prepare for the Big Bear.
Here is the long-term Lloyds chart updated:
Source: interactive investor Past performance is not a guide to future performance
Recall my analysis of FTSE in my COTW of 23 December:
“I expect a bear market in 2020”.
Events since then has helped to solidify my view.
The 2009 Credit Crunch low for Lloyds was the 17p mark. It would not surprise me to see that record broken in the months ahead. The severity of the economic and financial crisis to come will be far greater than in 2008.
I believe investors should now be concerned with the return of their investments rather than a return on their investments. A great wave of asset price deflation is upon us with crude oil at new lows.
Monday Flash: The FTSE is off by over 6% overnight as I write. Lloyds is trading at 40p – a low not seen since 2012.
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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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