The Lloyds share price has been building momentum since mid-October when a change in the UK government ignited a rally in UK assets.
Lloyds isn’t one of the FTSE 100’s top 10 performers since Liz Truss’s resignation, but Lloyds shares are a solid 10% higher since Sunak became PM.
An improvement in UK sentiment has seen FTSE 100 banks tick higher with Lloyds now trading at 46p, approaching the key psychological level of 50p. Whether the 50p target is reached depends on two key factors.
Inflation data
The UK economy is walking a tight rope with household spending erosion on one side, and detrimental fiscal measures on the other. Indeed, the UK government has steadied financial markets, but Lloyds customers will suffer as a result. The light at the end of the tunnel is falling inflation which will ease the pressure on households and allow the Uk government to adjust their fiscal plan in the Spring.
UK CPI inflation hit 11.1% in October, if this continues to rise in November, the market reaction could see Lloyds’ march higher thrown off course.
Global growth
Global growth data, including the UK’s economic data, will be increasingly scrutinised as we move into the end of the year. With the Federal Reserve signalling the pace of interest rate hikes could be about to slow, we could be about to see a global shift in monetary policy.
Each piece of economic data will become more important as investors attempt to gauge when this shift could happen. If perceptions of this shift changes materially before Christmas, Lloyds shares could be swept up in a broad risk-on rally which see their shares smash through the 50p mark.
Another source of potential good news for the global economy is China. Although Lloyds has minimal direct exposure to the Chinese economy, the end of the Chinese Zero COVID has the potential to unleash a tidal wave of cash as the world’s second largest economy lifts global investor sentiment. Cyclical sector such as banks would be likely beneficiaries.
Lloyds valuation and dividend
With the Lloyds share price at 46p, the bank trades at 5.9x historical earnings, 0.6x book value and has yield of 4.4%. All of these metrics are attractive on a historical basis and support further gains, should the macro picture permit.