The outlook for cyclical stocks like Lloyds Banking Group (LSE: LLOY) and their share prices is darkening as the cost of living crisis worsens.
However, could this FTSE 100 firm’s cheap share price still make it a top buy today?
Latest forecasts from the International Monetary Fund (IMF) underline the expanding threat to economically-sensitive shares like Lloyds. Yesterday, the organisation slashed its 2022 growth forecasts for the UK economy to 3.7% from 4.7%.
The IMF also reduced its estimates for next year, to 1.2% from 2.3%. This would represent the lowest rate of growth for any G7 nation.
Rates are rising!
The good news for Lloyds is that soaring inflation is causing the Bank of England to rapidly hike rates. This is good for banks as it increases the rates which they offer to savers and lenders, boosting profits in the process.
The Bank has raised interest rates for three months in a row. They could keep rising beyond economists’ projections too as inflationary pressures grow ahead of forecast.
The cheap Lloyds share price
I certainly believe the Lloyds share price looks dirt-cheap on paper. At 45.3p per share, the FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of 7.5 times.
This figure is well below the widely-regarded bargain benchmark of 10 times and below. Fans of Lloyds might argue that this provides a large margin of error
What’s more, Lloyds’ share price today also creates a bulky 5.3% dividend yield. This beats the Footsie average of 3.5% by a large distance.
Why I’m still not buying
All that being said, Lloyds still isn’t a FTSE 100 share I’m considering buying today. This is because I’m not just concerned about the bank’s fortunes as the economy suffers in the medium term.
There are a multitude of dangers facing Lloyds that stretch beyond 2023. First off is the threat of prolonged weak economic growth because of Brexit.
A group of MPs recently found that the cost of exiting the European Union to the domestic economy has been considerable. Things are likely to remain difficult too as the UK adjusts to life outside the trading bloc and trade flows are impacted.
Lloyds shares to remain under pressure
There are other significant long-term headwinds for Lloyds to overcome too. The threat posed by digital-led challenger banks looks set to continue growing as they expand their product ranges and brand awareness of Monzo and the other new kids on the block improves.
Research house Sheer Analytics and Insights believes the neo and challenger market will be worth $980.3bn globally by 2032. That compares with the $29.2bn it was valued at last year.
I’m also concerned because Lloyds doesn’t have exposure to foreign markets like other UK banks such as Barclays, HSBC and Santander. This means it is extra vulnerable to sluggish economic growth at home and also has no chance to capitalise on fast-growing overseas markets.