UK Q4 GDP unrevised at -0.2%; Lloyds’ outlook weighs on shares price

<p>The FTSE 100 traded in positive territory on Friday thanks to more heavyweight gains in oil stocks, who continue to see higher demand thanks to […]</p>

The FTSE 100 traded in positive territory on Friday thanks to more heavyweight gains in oil stocks, who continue to see higher demand thanks to rising Crude Oil prices. However, Lloyds shares weighed on the FTSE’s charge after shareholder sentiment was left disappointed by the banks outlook, whilst UK GDP for the fourth quarter stayed at -0.2% in a second reading by the Office of National Statistics.

The FTSE 100 rose 0.1% in trading with oil gains countered by weakness in miners, and underperformed broader EU Indices, with the CAC rallying 0.6% and the DAX seeing gains of over 1%.

Lloyds’ shares weigh on outlook
The main equity story of the day was Lloyds’ somewhat disappointing outlook. Lloyds, 40% owned the state, reported a return to annual loss of £3.54bn, having posted a relatively small £281m profit a year earlier, with yearly earnings hurt by a big hit taken from misspelling Payment Protection Insurance (PPI) in a period highlighted by the bank as a ‘transition year’.

However, it wasn’t so much the actual yearly loss that weighed on shares but indeed it was the rather dire outlook predicted by the banks CEO Mr Horta-Osorio that weighed on shareholder sentiment and the firms’ shares price. Lloyds warned that income would fall this year, continuing a falling trend of last year when income fell 10% to £21.2bn. Net interest margin is also expected to fall this year to 1.93% after a fall to 2.07% in 2011 due to funding costs.

It’s clear that the bank, along with Royal Bank of Scotland, is going through a huge transitional phase that will see both banks look incredibly different to that of which forced the state to bail them out at the height of the banking crisis. The changes being made at Lloyds and RBS, is a vital step towards putting both banks on a more sustainable growth path that satisfies their shareholders and UK taxpayers. Whilst Lloyds’ 2012 outlook is hurting investor sentiment today, the bank is also providing greater clarity around likely performance as transition continues. In addition to this, suppressing expectations today may not necessarily be a bad thing, particularly if the bank can turnaround in 2012 and perform better than beaten down expectations, though naturally with the headwinds facing the bank, this remains a tough challenge.

Nevertheless, the market reaction today has been subdued, though with Lloyds shares rallying on the back of RBS’s earnings yesterday and hitting a new 4-month high in the process, we would have needed to have seen sharply better than expected numbers to further lift Lloyds’ share prices today.

UK GDP contracts 0.2% in Q4 in 2nd reading
The Office of National Statistics confirmed in a second reading that UK GDP contracted 0.2% in the fourth quarter, as expected. The market reacted little to the GDP reading as a consequence.

The GDP reading was no real surprise in truth, with the market not expecting to see any revisions to the first reading. The real question will be whether the UK economy can bounce back in the first quarter of this year, and many indicators have suggested that we could avoid a second quarter of contraction, and stave off a technical recession, albeit any growth in Q1 is likely to be anaemic at best.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.