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At the beginning of April, at the height of the tariff-induced sell-off, the Barclays (LSE: BARC) share price bottomed at 241p. Fast forward a month and it has clawed back virtually all of those losses and trades at 297p. That means, a £5,000 investment a month ago would have grown to £6,160.
If an investor had have bought the dip, they would be sitting on a tidy profit. But such short-term gyrations in the share price don’t really help an investor determine whether a company makes a good long-term investment.
Recession fears
All the talk of tariffs and a global trade war have certainly heightened speculation that the US could be heading for a recession. If it does end up in a recession, that would hardly bode well for the UK economy either.
As a bellwether, banks provide a good leading indicator for the general health of an economy. Going by Barclays Q1 numbers released on the 30 April, recession fears could well have been overdone.
Income for the group rose by 11%, but costs only increased by 5%. This helped drive a 19% increase in profit before tax to £2.7bn. Earnings per share (EPS) grew 26%, bolstered by the company’s share buyback programme.
The blue-eagled bank is certainly very bullish on its prospects for 2025, upgrading its net interest income (NII) guidance. It now expects more than £7.6bn of NII this year, up £200m from only three months ago.
Structural hedge
One key reason why I continue to like Barclays is because of its ability to profit regardless of the future direction of interest rates. This is because of its structural hedge.
I contend that a lot of private investors continue to underestimate its importance to the bank’s NII.
At Q1, stronger-than-expected deposit trends in Barclays UK has further supported gross hedge income. Over the next two years, it has locked in £10.2bn of income. This is up £900m from Q4 2024. Income from this hedge will build further as it reinvests maturing hedges. In addition, it expects this contribution to continue well beyond 2026.
US consumer
The unknown variable that could completely scuttle the bank’s bullish stance is the US consumer. Its delinquency data in US cards remains broadly flat. The group’s impairment charge of £600m isn’t particularly elevated either.
However, the impairment charge is based on backward-looking data. At Q1, the consensus economic forecasts had changed very little from Q4 2024. Crucially, it was prepared before elevated US uncertainty, and a reduction in the country’s weighted average GDP from 1.6% to 0.8%.
If I look across different sectors of the US economy, the consumer is struggling. Luxury brands sales have collapsed and more people are shopping at the likes of Walmart – whose sales have gone through the roof.
Should unemployment figures really begin to increase dramatically, then all bets would be off and Barclays would be forced to reassess its economic scenarios.
The trouble is predicting the timing of a recession is nigh on impossible. I remember back in 2023 when virtually every analyst out there said a recession was inevitable. For me, Barclay’s highly diversified business model provides it with a degree of protection. That said, I am not in a rush to buy more of its shares just at the moment.
