Markets fall again but these three UK bank stocks are a buy

As recession warnings grow louder, investors across a range of assets are taking flight. Our City expert explains why and names the bank stocks that one high-profile analyst likes most.

Copper’s bear market and a big slide for oil prices today triggered a flight from stocks including Glencore (LSE:GLEN) and BP (LSE:BP.) as fears over a hard landing for the US economy intensified.

The potential demand impact of further big interest rate hikes as the US Federal Reserve fights against stubbornly high inflation, fuelled today’s commodities volatility as Brent crude fell 4% to $110 a barrel and copper retreated to a 15-month low.

The recession warnings have grown louder since the Fed hiked rates by 75 basis points last week and signalled it may do so again at its meeting next month. Markets are pricing for close to 350 basis points of tightening this year, up from 240 basis points as recently as early April.

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Tesla (NASDAQ:TSLA) boss Elon Musk now regards an American recession as “inevitable at some point” and Wall Street’s Goldman Sachs has put the chances of one in the next year at 30%, up from 15%.

The question for some investors is not whether recession can be avoided but how deep it will be. Copper, which is regarded as an economic bellwether, has now fallen by more than 20% since its peak in March in a reflection of the market’s current heightened anxiety.

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Leading US markets are already in bear market territory, having endured a prolonged sell-off that has left the S&P 500 some 24% below its peak in January.

UBS said today: “We don’t see a US or global recession in 2022 or 2023 in our base case, but it’s clear that the risks of a hard landing are rising.

“Even if the economy does slip into a recession, however, it should be a shallow one given the strength of consumer and bank balance sheets.”

The Swiss bank has studied return patterns around 17 US recessions in the last 100 years, separating them into shallow ones of less than 3% peak to trough decline and those above 3%.

It found that drawdowns associated with both types of recession lasted 12 months as an average, but the market fell 34% around deep recessions and 11% for shallow recessions.

This doesn’t mean the S&P 500 has already priced in a deep recession, however, as UBS says the decline so far has been driven by tightening liquidity, not fears of economic contraction.

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The VIX index of implied US stock volatility continues to trade around 30, which is above the long-term average of 19 and consistent with daily stock swings of almost 2%. The S&P 500 rallied by more than 2% on its return from an extended weekend yesterday but the momentum has been short-lived as European markets fell at the opening bell.

The FTSE 100 index reached lunchtime more than 1% lower at 7,063, with Glencore one of the biggest fallers. Shares fell 25.1p to 457.5p, wiping out the gains seen since Friday’s guidance that tight supply conditions had boosted earnings from its marketing arm to above the top end of its forecast range.

Copper miner Antofagasta (LSE:ANTO) fell 48.5p to levels last seen in February at 1,281p, while there were also declines of more than 3% for Rio Tinto (LSE:RIO) and Anglo American. BP and Shell (LSE:SHEL) shares dropped 11.65p to 383.7p and 68p to 2083p respectively.

Ocado (LSE:OCDO) led the fallers board, with the grocery technology stock trading at below the 795p paid by investors in yesterday’s heavily discounted £578 million placing of shares.

UK banks including Lloyds Banking Group (LSE:LLOY) defied the selling pressure after Jefferies concluded that the market had underestimated the net interest income impact of rising interest rates. Its regression-based indicators also point to stable credit trends through early 2023.

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Jefferies said: “We like all three banks though Barclays (LSE:BARC) is at the top of the pecking order given gearing to the combination of card lending recovery, US dollar strength, and positive UK rate sensitivity.”

The US bank sees a big upside of 131% on Barclays, which would take the shares up to 369p. They were a penny higher at 161p today.

Jefferies has also upgraded NatWest (LSE:NWG) to a “buy” recommendation after raising its target price from 246p to 359p, while Lloyds has been lifted from 65p to 78p. NatWest shares today rose 9.4p to 230.7p and Lloyds improved 0.3p to 43.75p.