Lloyds Banking Group (LSE:LLOY) has finally experienced some positive news in recent weeks. The Lloyds share price has spiked amid the announcements of Covid-19 vaccine breakthroughs. Due to these developments, share prices have surged across most markets. For example, the FTSE 100 has jumped nearly 15% in November alone and hit highs not seen since the summer. Investor confidence has definitely improved, in my opinion.
High risk or worth a chance?
The Lloyds share price is up nearly 40% this month as I write. At the beginning of November, shares could be picked up for a paltry 27p per share. Right now, I can buy shares for 37p. When the market crashed, the Lloyds share price suffered from a 50% decrease in value. The price at the beginning of November is also the same price as at the lowest point of the crash.
I would definitely class LLOY as a high-risk share right now. I believe there are two reasons why it’s share price has spiked. As I mentioned, there’s the Covid-19 vaccine news. Additionally, LLOY had encouraging third-quarter results, but more on that later. Despite this, I have reservations as to its investment viability right now. It is believed that the UK economy may only return to some form of normality in approximately 2023. I believe this is bad news for many sectors, not least banking.
Will Lloyds share price continue to climb?
LLOY’s share price benefitted from encouraging Q3 results posted in late October. It experienced an increased demand in mortgages and reported a pre-tax profit of £1bn for the quarter. This was substantially higher than the forecast of £588m, which was positive. Furthermore, Lloyds lowered provisions for expected bad loans. Analysts had forecasted a whopping £721m but it only set aside £301m to cover these possible defaults.
I believe Lloyds still faces challenges, though. First, it is intrinsically linked to the UK economy and its own recovery as a whole. In the third quarter, the economy grew by 15.5%. The forecast ahead is not so rosy. I believe the pandemic is not yet over, far from it, in fact. The new round of restrictions will affect the economy significantly and may reverse recent positivity when Q4 arrives.
Second, Lloyds could end up suffering due to the many small businesses that are struggling to survive. I believe the winter period is key and many will not survive over the coming weeks and months. Finally, the complexities and costs of Brexit will also negatively impact Lloyds’ share price and performance. Brexit could cost the economy billions of pounds, which will hit the recovery from Covid-19 hard.
My verdict
As of right now, I am not rushing to buy Lloyds shares. I feel like there is too much risk involved. For me there are too many variables and external factors which Lloyds cannot control.
Despite the Lloyds share price being rock bottom right now, I am still looking at other much more attractive alternatives.
