While the FTSE 100 has not made the best of starts to 2014, its performance has been much better than that of Barclays (LSE: BARC) (NYSE: BCS.US). Indeed, while the FTSE 100 is down over 1% in 2014, Barclays is down over 11% year-to-date. This is highly disappointing, but Barclays could yet prove to be a great investment over the medium to long term — here’s why.
UK Potential
Although sector peers such as Standard Chartered and HSBC have significant exposure to emerging markets with vast potential, Barclays’ focus on the UK could also prove to be highly lucrative. That’s because the UK economy has shown considerable strength in recent months, with forecast growth rates being upgraded over the last year. This bodes well for Barclays, since its future performance is closely linked to the performance of the UK (and global) economy, with asset price rises, greater activity in the mortgage and lending market, as well as increased consumer spending all having the potential to increase profits over the medium term.
So, while greater exposure to the arguably more exciting emerging markets of the world could be desirable, the UK could yet prove a highly profitable stomping ground for Barclays, too.
Improving Sentiment
With the government reducing its stake in Lloyds and RBS continuing to improve the quality of its asset base (as well as its profitability), sentiment surrounding the UK banking sector appears to be turning somewhat. Certainly, it remains an unloved sector (as shown by the relatively low valuations on many bank shares) but history tells us that sectors do not remain unloved forever. With the UK economy showing continuing strength, the pain (and blame) from the credit crunch could ease somewhat and make investors come back to the banks. This increased demand for bank shares could provide a boost to valuations going forward.
Looking Ahead
Trading on a price to earnings (P/E) ratio of just 8.6, Barclays is most certainly unloved at present. Indeed, its P/E ratio is far lower than that of the FTSE 100 on 13.2, which means there is significant scope for an upward rerating of Barclays’ shares. With the UK economy going from strength to strength and there being potential for investors to warm to the banking sector in future years, Barclays could prove to be a great play on the UK economy and on the UK banking sector.