The Brexit discount: why UK bank shares look cheap
Jamie Clark, manager of the Liontrust Macro Equity Income fund, says the share prices of Lloyds and Barclays are now looking cheap relative to history. He says this is largely down to Brexit, which has suppressed the valuations of companies whose fortunes are linked to the performance of the domestic economy.
“The argument seems to be that because Brexit is without precedent, predictive models offer little insight and UK-centric assets warrant a discount.
“This is moot and likely says more about the limitations of forecasting. Far more tangible, is the fact that the likes of Lloyds Banking Group and Barclays appear cheap by the standards of history,” he explained.
He notes that if you look at prospective earnings multiples, both banks are already pricing in a Brexit recession. However, in reality this may never happen.
“But ‘so what?’ you might say. Cheap doesn’t necessarily mean good value. This is partially true, but it does give us a margin of safety. That is, by buying a good business on attractive terms, we also acquire a cushion against the vagaries of markets, analytic errors and inescapable behavioural biases,” he noted.
The fund manager bought into both banks last year and feels confident about their prospects, given the gap between their modest valuations and the operational progress they have made in the years that followed the financial crisis.
“Both Lloyds and Barclays are intent on growing ordinary dividends as circumstances permit. Barclays’ strong full year update also signalled that it will soon join Lloyds in returning surplus capital through share buybacks.
“This is manna for income investors like us and only serves to demonstrate that the Brexit discount is offering us a margin of safety that’s too good to miss,” Clark concluded.