After the EU referendum on the 23rd of June, financial stocks have been getting hammered. The bleeding hasn’t stopped yet, and the Brexit verdict has hit British banks the hardest. Since the 24th of June, Royal Bank of Scotland RBS, Barclays BCS, and Lloyds Banking Group LYG lost 37.2%, 37.44%, and 36.26% in share value, respectively.
Banks in the US haven’t performed as badly, but they have also posted steep share price declines after the UK voted to leave the EU. Bank of America BAC, JP Morgan JPM, and Morgan Stanley MS have all seen their share prices drop by over 10% in the time since the vote took place.
Banks are unique because they rely on higher interest rates to make their money. When interest rates are low though, their bottom line becomes threatened.
Banking Profitability is Falling
At times of uncertainty, investors flee towards safer investments, such as treasury bonds. When there is a higher demand for these bonds, bond prices go up and interest rates go down. When the interest rates on treasury bonds are low, the profitability of banks becomes threatened.
That is because the spread between the cost of banks borrowing money and the profits they make off the interest from loans they provide shrinks. People will be dissuaded from holding their money in banks if the interest they earn from deposits shrinks even more, so banks will not lower the interest they pay to depositors. At the same time though, they are making less money off of the interest they earn from loaning out money because the treasury bonds lowered the bar for lending in the market. Because of this profit shrink, many banking stocks stand to get hit quickly, even though Brexit won’t actually take place for at least two years.
A Better Alternative
At such a time, it is best to turn a blind eye to the financial industry and seek better returns in the consumer staples space. Stocks within this sector tend to see less volatility because of the fact that their demand isn’t as affected by financial situations. In other words, folks are not going to part with consumer staples, even if things get pretty bad from an economic perspective.
The market is very uncertain right now, and at times like these, investors gravitate towards investments which have more predictability. It may be wise to buy these stocks now so that you can take profit from an increased preference for consumer staples.
Wal-Mart Stores Inc-WMT
Wal-Mart is the largest low-cost retailer in the world. They engage in the operation of mass merchandising stores. It’s worth noting that the company owns Sam’s Club and also has Wal-Mart stores abroad. WMT is a Zacks Rank #2 (Buy). The company provides investors with a 2.78% dividend. Something which is really great about Wal-Mart is its low beta of just 0.23. The stock has a track record of being a stable source of income for investors. Wal-Mart has a trailing twelve month ROE of 17.58%, and it also gets a score of “A” for Value and Growth in our Style Scores.