Lloyds shares (LON:LLOY) are not alone in experiencing sharp declines due to the coronavirus COVID-19 pandemic and investors will be accessing a number of shares now ‘on sale’.
The Lloyds share price has dropped a significantly since the beginning of 2020 with shares down over 40% from the start of 2020 to the middle of March.
The drop is inextricably linked to the spread of coronavirus, and the market scrambling to price in the decline in economic activity.
However, historical analysis of shares and markets during periods of panic highlights that in almost all circumstances going back to the Great Depression, shares overreact to the downside during the onset of negative news, before recovering towards prior valuation averages.
Lloyds share price
Lloyds share price as shares are currently trading at just 9.6X historical earnings. This compares to a long term FTSE 100 average of around 17x.
Value investors would argue the low PE Ratio signals a buying opportunity, but this doesn’t reflect the drop in earnings in 2020, which cause earnings ratios to increase for 2020 FY.
This won’t be a surprise to the markets, however, and investors will eventually look past COVID-19, just as they looked past PPI payments and the restructuring costs caused by the financial crisis.
Lloyds’ profitability is directly linked to the strength of economy and borrowing demand by business and companies, which is collapsing as coronavirus fears cause panic among consumers and the government restricts everyday activities.
Notwithstanding the economic pain driving downside in Lloyds, this pain is deemed necessary by governments to help combat the spread of coronavirus. Further volatility in shares should be expected as we move towards a peak in new COVID-19 cases and restriction on populations are increased.
“We know you have to hurt the economy to stop the virus. But the damage is probably going to be temporary, and we’re going to see a recovery probably in the back half of this year,” said Art Hogan, Chief Market Strategist at National Securities in an interview with CNBC.
As well as relying in strong economic activity for sustained profitability, Lloyds is also a facilitator of economic activity.
The UK government have said they stand ready to support the economy and have introduced the most significant package of financial support measures made by a peacetime government.
Through the new Coronavirus Business Interruption Scheme, the UK government will underwrite risky loans to business made by banks such as Lloyds.
This will provide support for Lloyds’ underlying lending business as they offering payment holidays for personal loans and mortgages.
These measures will avert the worst case scenario for banks and investors should note we are facing a medical crisis as opposed to a financial crisis similar to 2008.
Banks such as Lloyds are structurally sound but profitability is set to be dented for a quarter or two.
This will be temporary, and just as the economic slowdown was quickly priced into the Lloyd share price, markets will react with buying on any positivity in the battle against COVID-19.