Investors should watch banking stocks from the side lines
Graham Spooner, investment research adviser at The Share Centre, takes a look at the banking sector and explains what the ongoing crisis means for investors.
The continuing turmoil in the banking world has put further pressure on the sector and company share prices. Last week we saw yet more changes within the sector; with M&S and Asda launching financial products and the Co-op buying branches from Lloyds.
"There is perhaps more uncertainty surrounding the banks than any other sector and our overall view is that investors should stay on the side lines for the time being.
"There does however remain an appetite among some investors. For those looking for something short term and higher risk, Barclays would be our preferred stock pick of the UK high street banks. Over the last four months, the share price fell by around 30%, and with so much economic uncertainty in the present climate, buyers should be wary of chasing the price higher. At the moment, this stock is only for short term traders.
"Likewise, we recommend investors who want to gain exposure to the sector for the longer term only drip feed into weakness. Standard and Chartered is a preferred stock for investors willing to take a longer term view. The group is a geared play on emerging markets, with little or no exposure to the problems in Europe. Operations in Malaysia, Indonesia, China and Hong Kong have been performing well, helping offset a decline in India and South Korea. The group, like most banks, has seen pressure on returns from its assets, while costs have been creeping up, especially in Asia.
"Investors are advised to steer clear of both Lloyds and RBS for the time being. There is no short-term fix for the current situation and prices will continue to remain unpredictable. Those hoping for a recovery will have to be very patient as the UK's austerity measures, new rules and regulations and the ongoing problems in Europe continue to act as a drag.
"Lloyds' management suggested last year the turnaround could take up to five years, meaning there is little chance of any dividends for a while yet. The share price remains volatile off the back of the European crisis and there have also been fears raised over the housing market and the bank's exposure via its mortgage book. Similarly RBS's restructuring plans are going to take time.