2024 has been a 12 months of ups and downs for UK large-cap buyers with the FTSE 100 gaining 7.8% on the time of writing. It hasn’t all been easy crusing with middling efficiency since June this 12 months.

Whereas I’ve received my eye on a number of shares, there’s one market darling that I’ll be avoiding subsequent 12 months.

Surging share price

The inventory in query is Barclays (LSE: BARC). Shares within the excessive road financial institution have been hovering in 2024 together with a 29.4% acquire within the final six months and 90.6% within the final 12 months to £2.70.

In February, the corporate introduced £2bn in cost-cutting measures, principally throughout its funding financial institution and UK retail financial institution. It’s a part of a broader three-year reorganisation plan because it appears to shed 5,000 jobs and simplify the enterprise.

Shareholders have additionally been impressed by Barclays’s ambition to return £10bn over the subsequent two years via dividends and buybacks.

Mixed with sturdy Q3 outcomes forward of expectations, together with a 23% enhance in third quarter revenue to £1.17bn, it’s simple to see why buyers are upbeat.

Why I’m cautious

The turnaround plan is underneath method and there are indicators of early success. Nevertheless, I’m cautious of being too bullish on the inventory.

For one factor, I see the potential for profitability pressures in 2025. Rates of interest are extensively tipped to fall, and this might put stress on the margins lenders can cost within the ultra-competitive deposits market.

As a serious supply of funding, which drives price of capital and due to this fact profitability, that is one thing I’m aware of proper now.

There are additionally the elemental adjustments to the group’s operations. A shrinking of its funding banking unit has been well-telegraphed, however third-quarter earnings in its funding financial institution nonetheless grew 6% and in addition beat expectations.

Whereas I perceive that volatility on this division is usually a problem, it may additionally present upside to the financial institution within the good years.

Valuation

One more reason I’m steering away from Barclays in 2025 is valuation. Shares within the enterprise have been ripping increased and that’s nice for buyers who’re alongside for the trip.

Nevertheless, the inventory has a dividend yield of three.1% proper now and is buying and selling at a price-to-earnings (P/E) ratio of 9.6. The important thing for me is how that compares to its UK banking friends.

All three of HSBC, Lloyds and NatWest are buying and selling at round 8 occasions earnings proper now. That alone tells me that Barclays is a bit of overvalued.

It’s an analogous story on the yield entrance. Lloyds and HSBC have considerably increased yields of 6.2% and 5.3%, respectively, whereas NatWest boasts 4.3% for good measure.

Verdict

I don’t see something compelling to counsel Barclays is a greater purchase than the opposite banks proper now. The corporate has introduced some shareholder-friendly initiatives and is on a drive to spice up profitability and return capital.

Nevertheless, I’m a Silly investor so I prefer to take a long-term view. With increased yields and a secure working mannequin, I’ve HSBC as my front-runner throughout the trade at current.

Given the potential price cuts, I don’t suppose I’ll be including to my monetary companies publicity in the interim. I’ll be trying in additional defensive, non-cyclical sectors like prescription drugs for my subsequent buy.