Barclays (LSE: BARC) shares were above 217p in January. Then the war in Ukraine happened and jolted the world economy. Today, the bank’s stock changes hands for around 171p, as I write.
On a one-year view, the price hasn’t moved much. Last August, I could have bought some shares for about 183p. But, as with all the banks, we tend to see a lot of price volatility along the way. And I reckon that’s because banks operate cyclical businesses.
Remarkable resilience
However, to me, banks are ‘special’ cyclicals. And that’s because their stocks tend to be among the most reactive to economic and geopolitical events. But it’s not just actual events happening on the ground. Bank shares can plunge or soar according to predictions, forecasts and perceptions as well. If there’s even the slightest whiff of economic changes in the air, the banks’ share prices will likely move with gusto.
But I’ve been surprised at how resilient Barclays’ has been this year. It’s down a bit, yes. But it hasn’t crashed to the lows of 2016 or 2020. And given all the bearish talk about a looming recession this year, the stock’s performance encourages me.
Banks stocks can act like an indicator of how bad future economic pain may become. And that makes sense to me, because banking businesses piggyback economic activity. If companies and individuals are doing well, banks will likely thrive.
And the reverse is true. So I see the resilience of the Barclays share price as positive. My guess is the stock would have already plunged to its previous lows before any imminent recession if it was going to.
Lower earnings ahead
But City analysts do expect some pain for the business. They’ve predicted a decline in earnings of almost 27% for 2022 and a further single-digit percentage easing the year after that.
However, July’s half-year results report revealed that gross income was actually higher year on year. And the earnings were dragged down mainly be higher litigation and conduct costs. And, on top of that, some credit impairment charges affected the figures.
But I’m not panicking now because I reckon lower expectations are already in the price. Indeed, the forward-looking earnings multiple for 2023 looks undemanding at just below six. And the value case is bolstered further by the price-to-book rating running around 0.4.
A recession could be mild
However, it’s still possible for earnings to crash and prove the analysts wrong. But I don’t believe they will. The average recession tends to be counted in months rather than years. And there’s a growing chorus of voices suggesting we’ll likely see just mild economic weakness ahead. So those analysts predicting small damage to Barclays’ earnings in 2023 could be on the money.
Chief executive CS Venkatakrishnan said in July’s report: “The broad-based income growth in the first quarter continued across all three operating businesses in the second quarter.” And that suggests the Barclays business is in relatively good shape.
I’m tempted to look beyond recession fears and buy some Barclays shares now. Although nothing is certain, there’s a chance earnings will increase as world economies rebuild in the years ahead.