As you should know by now, I am not a big fan ofBarclays (LSE: BARC) (NYSE: BCS.US) and the banking sector at this point in the business cycle.
But what if one of the most prestigious British banks were able to deliver a return on your investment of 25% before taxes, and excluding dividends, in 2015?
Too Good To Be True?
A 25% rise in Barclays stock implies a price target of about 300p, which is only 5% above the average stock price target from brokers, and about 20% below top-end estimates. For that to happen, you must believe that:
a)Results from the Bank of England stress test are reliable. If so, Barclays capital position isstrong enough and dividends are safe.
b)Barclays will deliver stellar earnings growth into 2016.
c) The bank will improve its risk profile with regard to impairments, while cutting costs. If the banks impairment cycle has peaked, hefty fines will go down over time.
d) The banks marketing push will allow it to gain customers and market share vis-a-vis rivals.
Moodys
Enter Moodys, arguably the most important credit rating agency in the world.
It said last week that results of the PRAs UK-specific stress tests on the eight largest UK banks and building societies demonstrate enhanced capital positions and improved asset quality for the system as a whole, and shows that the UK banking system has the capacity to withstand unexpected losses resulting from UK-specific risks.
Is this good news for Barclays?
Caveats
One caveat is that the revenues that the bank generates outside the UK amount to about 60% of the groups total, as at the end of 2013, although Barclays isshedding assets in Europe and elsewhere.
It also emerged recentlythat the bank may have toset aside more than the 500m it had pencilled in order to settle allegations according to which some of its traders helped rig the foreign exchange market. Thats already priced into the shares, the bulls would argue.
Political Risk
How important, however, is the UK governments recent decision to withdraw its legal challenge to the EU legislation that caps bankers bonuses? Does it show weakness of intent and action?
How about political risk in the year of the general elections?
Its difficult to say, but a strong government is needed for Barclays stock and the broader banking sector to grow at a fast pace in the next few years.
The FTSE 100grewin line withthe S&P 500for just less than a decade since Black Monday in October 1987. It recorded a +289% performance between November 1987 and the summer of 1998, when the Asian crisis hit the markets worldwide. Barclays stock registered a +500% performance over the decade starting July 1988, and that followed big structural changes in the way trades were placed and executed, among other things check out the Big Bang and thederegulation of the financial system in the UK in the 80s!
Since the stock market rally started in March 2009, the FTSE 100 has underperformed the S&P 500 by about 100 percentage points. A top-down approach suggests political risk should not be overlook in 2015 and beyond
Whatever the outcome of the general elections next year, however, you MUST consider a couple of top names outside the banking sector thatcould prove particularly resilientinto 2016– you find them in our latest report, which is FREE fora limited amount of time.
If you have appetite for risk, however, I urge you to learn more about a company whose shares may bounce back after a big drop in early December. No kidding: capital gains of 15% or more could be achieved in 2015(which is consistent with its track record in the last five years), although you must embrace risk to deliver that kind of performance.
Finally, one defensive business,whose sharescould easily deliver a 15% capital gaininto 2015, has also been included in our latest report, which comes without further obligations.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
