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With the FTSE 100 up around 9% this year, obvious bargains in the UK stock market are scarce. But I think there are still places worth looking.
Finding shares to buy
Investors have literally thousands of choices when it comes to finding stocks to buy. But one way of starting to cut down the field is by looking at the macroeconomic backdrop.
Interest rates, inflation, and GDP growth can all change quickly. So buying a stock just because of a favourable macroeconomic environment is generally something to avoid.
However, when a business with long-term competitive strengths meets a favourable environment, the results can be very positive for investors. And I think that’s worth keeping in mind.
Right now, the UK’s in the following situation:
- Interest rates are rising – the Bank of England has boosted rates to 4%, marking the end of a long pause and a change of direction.
- The economy’s in decent shape – GDP grew 0.7% in Q3, which is its fastest pace in two and a half years.
That combination tends to suit one industry in particular – banks. When rates go up, margins widen and a growing economy often (but not always) boosts demand for loans.
As a result, I believe it’s a good time to think about buying shares in a bank with long-term competitive strengths. And the FTSE 100 has one that might fit the bill.
The UK’s largest lender
Banks make money by lending at one rate and borrowing at a lower one. And the cheapest cost of financing is customer deposits, most of which pay little or nothing.
Lloyds Banking Group (LSE:LLOY) has the largest share of these in the UK. That gives it a genuine cost advantage, which can be a big help when lending margins expand.
On top of this, it also has some other durable strengths. A network of 275 branches mean it has a presence on virtually every high street, meaning it’s second to nobody in terms of convenience.
In the short term, higher rates can be awkward and the share price has been falling more recently. Savers want higher rates almost instantly, but the effect on fixed-rate mortgages is much slower.
The big – and obvious – question is where interest rates go further down the line. If they fall, margins will contract but if they go too high, demand might fall away as loans become unaffordable.
It’s a fine balance and predicting it is difficult. But a combination of long-term strength and a supportive environment right now mean I think this could be a good time to take a look at the stock.
Long-term investing
Predicting where interest rates will be 10 or 20 years from now is virtually impossible. But there are always uncertainties when it comes to investing – that’s the nature of the business.
Investors can’t eliminate the unknowns entirely. What they can do however, is look for opportunities where long-term strength meets a favourable environment.
I think that might be the case with Lloyds Banking Group right now. It’s underperformed the FTSE 100 this year, but I can see a clear reasons for optimism ahead.
Should you invest £5,000 in Lloyds Banking Group Plc right now?
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Stephen Wright does not own shares in any of the companies mentioned.
This story originally appeared on Motley Fool
