For me, there are few less appealing UK shares out there than the banks. It’s not just the immediate threat caused by the double-whammy of Covid-19 and Brexit. It’s the probability that Bank of England interest rates will remain at rock-bottom levels for some years to support the economic recovery.
All of this means that I’m not the biggest fan of Lloyds Banking Group (LSE: LLOY). In fact, fresh growth forecasts from the International Monetary Fund (IMF) have lessened my appetite for the FTSE 100 bank still further.
On Tuesday the IMF raised its estimates for global growth in 2021 to 5.5%. This is up 0.3% from its prior forecasts and reflects “a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies,” it said.
But the IMF went the other way in terms of its UK forecasts. It cut its growth estimates for this year to 4.5%, down a whopping 1.4% from its previous predictions. The body reckons that economic activity on these shores will remain below 2019 levels into 2022.
A high-risk UK share
It’s clear that the economic picture for Britain has worsened in recent months. The services-heavy nature of the economy means that GDP here faces significant perils from fresh Covid-19 lockdowns. The emergence of trade friction following the end of the Brexit transition period in 2020 has muddied the waters as well.
Naturally this bodes badly for cyclical UK shares like Lloyds. The FTSE 100 bank has already swallowed a shade under £4bn in Covid-19 impairments. It can expect the number of bad loans on its books to keep swelling too as corporate insolvencies rise and unemployment soars. I don’t think revenues will break out of their tailspin either (income dropped 13% in the nine months to September).
I might be wrong of course. The rollout of Covid-19 vaccines in the UK could light a fire under the British economy and carry profits at Lloyds through the roof. And the share price rise since last November suggests lots of UK investors think there’s a chance of that.
2 safer FTSE 100 shares!
But I won’t be taking what I see as a risk by investing in Lloyds. I think there are stacks of other UK shares that should thrive in 2021 whatever happens to the British economy.
For example, Vodafone Group is expected to deliver another year of meaty profits growth in 2021. Sure, tough economic conditions in its European heartlands might hamper earnings somewhat. But I feel the 5G rollout, allied with strong data demand growth elsewhere, should still keep the bottom line rising.
I’d also rather buy United Utilities Group in 2021. The long-term outlook for UK shares like this are always fraught with regulatory dangers. But current Ofwat rules mean the firm doesn’t have to worry about legislative issues until 2025. The water supplier operates in a very defensive sector and I think that should support its profitability at least until then.