A P/E ratio of around 7 for a FTSE 100 share such as Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) suggests to me that the company could offer a large margin of safety. Even though the index has fallen heavily in recent months, I’m struggling to find many stocks with such low valuations.
Investors, it seems, are adopting an increasingly cautious stance on the outlook for the UK economy. That’s in spite of it being forecast to grow at an annualised rate of 1.7% from now until 2022. Although that is not a particularly fast pace of growth, it is nevertheless relatively impressive in my view considering that the country is experiencing an uncertain period due to Brexit.
Further, Lloyds and other UK-focused shares could experience profit growth over the medium term. Employment levels are relatively high, while wage growth is at its highest level in a decade and is well ahead of inflation. Therefore, while nervousness is natural ahead of a major change such as Brexit, the economy seems to be performing relatively well in the circumstances in my opinion.
Clearly, that could change depending on how Brexit turns out. In my view, a no-deal Brexit could become increasingly likely since the EU seems to be unwilling to negotiate further. Since Theresa May’s deal is seemingly unpopular among MPs, the chances of it making it through Parliament appear to be slim. Therefore, the first quarter of 2019 could be interesting, and even dramatic, for the UK from a political perspective.
As a result, it wouldn’t surprise me if the Lloyds share price remains volatile. It could even fall further. But I believe that with a margin of safety already included in its valuation, it may offer impressive capital growth in the long run. Alongside this, I believe it has an improving balance sheet, has become relatively efficient and its investment in digital opportunities may deliver improving financial performance in future years.