My hunt for UK shares that can thrive in a low growth climate has not let up. Barclays (LSE:BARC) has long been in my sights. Its share price has been bruised as concerns about the UK economy have risen. Over the last month alone, 10% of its value has been slashed. Could this be my contrarian moment to buy the shares at a discount? Potentially. I believe Barclays shares were oversold earlier this year and are primed to blossom even in the event of a recession.
Positives
I feel the big banks can now shrug off even the most savage economic downturn. Regulators and central banks have ensured that institutions have the adequate capital buffers to absorb colossal amounts of red ink. So should the worst happen, banks should be resilient.
Additionally, Barclays’ diversified business model means many of its lines are less exposed to the direction of the UK economy. In contrast, peer Lloyds Bank is more focused in UK retail banking, thus more susceptible.
Furthermore, high inflation is increasing the prospect of higher interest rates for longer. High interest rates should boost lending margins for Barclays.
Why Barclays shares over the other banks?
I think Barclays shares are already priced for misery, so there is upside potential for a contrarian like me. Big lenders’ stocks are currently trading around 20% below share price targets set by research analysts, according to Morningstar. The reason Barclays is the most attractive to me is simply because it is the cheapest of the lot. It has a price to earnings ratio of five times, whereas its peer average is eight times. For example, Standard Chartered is valued at more than double (8.9 times) Barclay’s.
The big risk for me here is if Barclays’ big discount relative to its peers is justified. I do not think it is. Much of the bank’s trials and tribulations have been self-inflicted. I think this has weighed negatively on the sentiment of Barclay’s shares. One example is £1.9bn in litigation and conduct charges the bank settled in the first half of the year. Frankly, I don’t think Barclays shares will be on the naughty step for long once the bank gets profits moving back in the right direction.
Headwinds for Barclays
However a key challenge I envisage for Barclays is the collapse of deal-making as interest rates rise.
This year, the number of IPOs in the US and Europe have tumbled. (M&A) activity has crashed to historic lows. Barclays is a leading player in this area so a protracted lull could sting its bottom line.
Conversely, trading desks do well when financial markets are volatile, whether on the way up or down. Barclays is well positioned to reap the benefits.
Best of the banks
So, while I feel a downturn may be brutal for customers and employees, for banks it could be a gift in disguise. Barclays is not the only big bank listed on the FTSE 100 that has the potential to do well. But I am leaning towards it because it offers the best value.
The relatively cheap price looks like a bargain to me once I consider analysts price targets for the stock over the next 12 months is nearly double its current price.
I will most likely buy shares in Barclays before the month is out.