There have been some bumps along the way, but Britain’s banks have gained decent ground over the past year. Take Barclays (LSE: BARC) as an example. The FTSE 100 business has risen 52% in value since this point in 2021, as optimism concerning the global economy has improved.
Barclays is a giant in the fields of retail and investment banking. Theoretically then, it should see demand for its financial services rise from both individuals and companies as the world bounces back from the shock of Covid-19. Meanwhile, improving economic conditions might feed through to a much-better performance from the investment bank, shareholders are hoping.
I’d claim it’s a little too early to expect a strong and sustained recovery at this FTSE 100 firm however. With inflation soaring and the Covid-19 crisis dragging on, I think profits at economically-sensitive shares like banks remain in danger. Barclays operates in the UK and the US, economies whose growth outlook were both cut by the International Monetary Fund just yesterday.
The organisation noted that “the global economy enters 2022 in a weaker position than previously expected”. This should give all share investors like me food for thought.
Trouble for Barclays’ investment bank?
That ascent in bank share prices over the past 12 months also coincides with market expectations that central banks will periodically raise rates over the next year or so. This is beneficial for the likes of Barclays as it widens the difference between the rates can offer to lenders and to savers, boosting profits in the process. The inflation explosion of more recent months has fed speculation of several strong interest rate hikes too.
For Barclays however, the prospect of higher interest rates is a double-edged sword. Sure, positive central bank action would boost earnings at the retail business. But Barclays’ gigantic investment bank could take a hit as higher rates push up investment costs. They also hit spending levels and push up borrowing in the broader economy, denting GDP growth and indirectly damaging investor returns.
Should I buy other cheap FTSE 100 shares?
That said, Barclays’ share price still looks pretty cheap, despite the gains of the past year. The question then, is whether the stock’s worth a ‘punt’, despite those risks discussed above. At current prices of 204.5p per share, the FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of 7.5 times. It also offers great value on paper from an income perspective. Its 4.1% dividend yield for 2022 beats the Footsie average of 3.5% by a decent margin.
Of course, a share’s cheapness doesn’t necessarily offset the colossal risks it faces though. Some UK shares are ultra cheap for a reason, and I believe this is the case with Barclays. The economic landscape remains packed with danger for cyclical shares like this.
Besides, there are many other cheap FTSE 100 stocks for me to choose from that face lesser dangers than Barclays. So why should I take a chance with this high-risk bank? I’d much rather go shopping for other bargain stocks right now.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
