How will Britain’s banking sector fare in 2020?

Why investors looking to take a view on the UK economy’s prospects this year might want to start by looking to the banking sector.

2020 is turning into something of a “make or break” year for Britain. At the start of the year, the main item on the political agenda was to tackle talks on the UK’s future relationship with the European Union (EU). Technically, Britain left the EU at the end of last year. But the full impact of that decision won’t be felt until at least the end of this year, and will very much depend on how talks play out.

Then the coronavirus outbreak struck, turning everything upside down. In common with many other parts of the world, the UK has been in lockdown since late March. That in turn has battered the economy, with GDP plunging and unemployment soaring. At the same time, we’ve seen unprecedented measures from both the government and the Bank of England, designed to shield the economy as much as possible while it is in “hibernation”.

Will these measures be sufficient to offset the damage to the economy? Will consumers emerge from lockdown desperate to spend, or too fearful to return to their old ways? And even with all of this going on, there’s still Brexit to deal with – will the talks lead to a deal by the year-end, or is there more disruption to come?

Betting on British banks

Investors who are looking to take a view on the UK economy’s prospects this year might want to start by looking at the banking sector. Different industries will be affected in a range of different ways by the coronavirus, but banking has exposure to them all, as well as to the health of the consumer and the all-important housing market.

Yet if you believe that the UK economy is set for a vigorous rebound, then perhaps the banks have already been punished enough, and the potential for a solid recovery is not priced into their shares. At these levels, you might think that they’re worth investing in.

On the other hand, if bad debts rocket, house prices tumble, and consumers decide to rein in their spending more aggressively than expected, perhaps the bad news is only just beginning. And what if Brexit doesn’t go smoothly? Or the digital “challenger” banks start to take more market share in significant areas from the traditional high street sector? If that’s the case, then perhaps the problems facing UK banks are set to rise.

How to trade the banking sector

You could take a view on an individual bank, either going long if you’re bullish or shorting it if you’re negative (shorting allows a trader to profit from a falling share price). However, this exposes you to idiosyncratic risks. Some banks are more exposed to the UK’s housing market than others, while political disruption in other global markets can be more of an issue for some (such as HSBC for example). You don’t want to find out that you are correct in your “big picture” view, only for a company-specific event to derail your thesis

Alternatively, you might have no strong view on the outlook for the sector as a whole – but you might believe that a certain bank will outperform its peers, regardless of whether share prices overall are going up or down. How can you make such a “market-neutral” bet in a convenient manner?

What you need is a straightforward way to take a position on the entire sector. And the good news is that CMC now offers you the ability to do so. Whatever your view, long or short, bullish or bearish, you can express it using CMC's share baskets. Share baskets offer investors a cost-effective way to trade a wide range of industries and themes, while diversifying their exposure within a theme. The UK banks share basket offers exposure to seven of the biggest banking names listed in London, including Standard Chartered, HSBC, Royal Bank of Scotland, Lloyds Banking, Barclays, Close Brothers, and Virgin Money UK.

Find out more, and sign up for an account at cmcmarkets.com

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

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