Improving economic optimism is pushing the share prices of many cyclical FTSE 100 shares through the roof. BP (LSE: BP), for example, has risen an impressive 48% in value during the past 12 months. Lloyds Banking Group (LSE: LLOY) and Tesco (LSE: TSCO) have also jumped 38% and 27% respectively since this point last year.
I wouldn’t rule out more gains for these FTSE 100 shares as the global economy steadily recovers from the pandemic. But as someone who invests with a long-term view, I won’t touch any of them with a bargepole. Allow me to explain why they’re far too risky for me.
Will crude prices sink?
It shouldn’t be a surprise that BP has been the strongest performer of these three FTSE 100 shares. Soaring energy demand has sent crude prices through the roof, the Brent index reaching its highest since 2014 early this week. BP’s profits rocketed to $4.07bn in the fourth quarter of 2021, from $115m a year earlier, thanks to the oil-price boom.
They could continue rising as well in the near term on huge supply shortages. After all, the IEA recently upgraded its forecasts for oil consumption in 2022. But I won’t buy BP as I worry about what prices the oil major will receive for its product several years from now.
Fossil fuel investment in non-OPEC countries has ballooned in recent years, while progression on a nuclear deal between the US and Iran could flood the market with supply too. I also think growing demand for renewable energy could sink BP’s profits as worries over the climate emergency worsen.
Rising competition
Tesco is Britain’s biggest retailer and has the financial might to invest in its operations. It also has the biggest online shopping operation in the business which will allow it to capitalise on the e-commerce revolution. But I fear that profits could struggle as consumer spending comes under increasing pressure and people flock to value retailers such as Aldi and Lidl.
I also fear for Tesco because competition in the UK grocery sector continues to hot up. Last week, for example, popular value retailer Poundland announced it was dipping its toe into the fresh food category.
Rapid expansion by the aforementioned German discounters, and huge investment on the high street and online by Amazon, already pose huge threats to long-term profits. Not to mention massive threats to future margins as Tesco may have to slash prices more aggressively to compete.
Will Lloyds’ share price slump?
The Lloyds share price has risen strongly on hopes of big interest rises. In fact, a backcloth of runaway inflation has raised expectations of rate hikes to boost the profits banks make as lenders. Many commentators now expect the Bank of England benchmark to end 2022 at 1.25%, up 1% from January.
But I fear the advantage of higher interest rates to Lloyds is outweighed by the implications of Britain’s struggling economy. I think UK-focussed banks like this could face a wave of bad loans as the cost of living rises and businesses go to the wall.
It’s likely that revenues would struggle amid a long and broad economic downturn as well. I also think Lloyds could struggle in the years ahead as challenger banks chip away at its customer base. These digital-led entrants now hold an 8% market share in the UK, the FCA says.