The Barclays share price is in free-fall! This is what I’d do now

Thinking of buying into the dips over at Barclays? Royston Wild explains why you probably shouldn’t be too hasty.

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Barclays (LSE: BARC) is, so far, having a year to forget. Never mind the so-called Boris Bounce that’s boosted large parts of the economy following December’s general election. This FTSE 100 share is one that’s been in freefall since the middle of that month.

Its share price has lost 27% of its value since then. Fears over a possible UK coronavirus epidemic sent its share price to six-month lows below 140p this week too.

As a consequence, Barclays looks pretty attractive on paper. It currently trades on a forward price-to-earnings (P/E) ratio of 6 times. Any reading around or below 10 times is widely considered to be in ‘bargain basement’ territory. Surely this reading bakes in the risks to the bank’s near-term earnings picture, right?

Not in my book. This is one-blue chip I’d be reluctant to buy today.

Virus concerns

Let’s look at the most recent disaster for the Barclays share price, the tragic coronavirus outbreak. The government has just warned that millions of people could be laid up sick and pulled from the workforce in the event of widespread infection on these shores.

Expectations of a massive rise in COVID-19 cases is a theme that’s gaining ground too. On Wednesday, the country’s chief medical officer said that “it is likely… that we will move on to onward transmission and an epidemic here in the UK.”

It’s not just the direct impact of the virus that could smash Barclays’ bottom line in 2020 though. The Federal Reserve’s decision to cut its benchmark rate by a whopping 50 basis points on Tuesday is likely to lead to a spate of similar moves by other global ratesetters.

As Neil Birrell, chief investment officer at asset manager Premier Miton, comments: “The move by the Fed comes as a big surprise…. Cuts were already discounted, but not so much so soon. It’s likely that other central banks will follow.

The Bank of England has already said that it will take “all necessary steps” to mitigate the impact of the coronavirus. And it gives additional reason for Barclays and its investors to be nervous. Rock-bottom interest rates have kept a lid on bank profits for more than a decade now.

Forecasts to fall?

An escalation in coronavirus cases isn’t the only obstacle threatening to derail Barclays’s earnings however. The banking colossus saw income edge just 2% higher in 2019 (to £21.6bn) as the UK economy, dented by persistent Brexit-related uncertainty struggled.

Just as troubling was news credit impairment charges rose by almost a third year-on-year to £1.9bn. 2020 could be another year of extreme difficulty as the threat of a no-deal withdrawal from the European Union persists. I fully expect revenues to continue struggling for traction and the number of bad loans to keep rising.

City analysts expect Barclays’s earnings to rise 65% this year. This, though, is a reading that’s likely to be significantly hacked down in the weeks and months ahead. For this reason — not to mention the possibility of persistent, Brexit-related profits pressure in the new decade — I plan to continue avoiding this particular Footsie share.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

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