The HSBC Holdings (LSE: HSBA) share price has fallen by 60% since the start of 2018. The stock now trades at levels not seen for 25 years.
HSBC shares could be a bargain at this level. But I can’t bring myself to own shares in this Asia-focused bank today. So I want to explain why I’m avoiding HSBC and introduce the emerging markets stock I’ve been buying instead.
What’s wrong with HSBC shares?
HSBC is facing some tough headwinds. Coronavirus has caused a slowdown in new lending and a sharp increase in expected bad debts.
Profit margins on mainstream lending were already low, but they’ve fallen further this year as central banks have cut interest rates once again.
HSBC is also caught in the middle of the US-China trade war. More than 90% of the group’s 2019 profits came from its Hong Kong-based business, so the bank can’t afford to alienate China. But HSBC needs to avoid antagonising the US too, as its international operations are an important attraction for clients.
I prefer to avoid investments that carry political risk, as it’s hard to predict how things might turn out.
One final concern is HSBC’s dividend. The UK regulator forced big banks to suspend their payouts this year, but HSBC has since said that its dividend policy is under review. That usually means a cut is likely, so I expect a reduced payout from next year.
Although I do expect this 155-year old bank to adapt and survive, the outlook is too uncertain for me. I’ve decided to avoid HSBC shares and invest my cash elsewhere.
Here’s what I’ve been buying
The company I’ve chosen to provide emerging markets exposure in my portfolio is FTSE 250 asset manager Ashmore Group (LSE: ASHM). I should point out that this isn’t a direct replacement for HSBC. It’s not a bank and it doesn’t make most of its money in Hong Kong.
Instead, Ashmore invests in debt and other assets in a wider range of emerging markets.
What Ashmore does offer is many of the things HSBC lacks.
For example, it has been consistently profitable in recent years and generates very high profit margins. Last year’s operating margin was 62%, resulting in a return on equity of 22%. HSBC’s 2019 return on equity was 3.6%.
Ashmore’s dividend is another attraction. The smaller firm’s payout hasn’t been cut since its flotation in 2006. Over the same period, the dividend from HSBC shares was cut in 2009, suspended in 2020 and looks likely to be cut in 2021.
This leads me to one of Ashmore’s other attractions. Founder-CEO Mark Coombs still owns 33% of the business. In my view, that means his interests should be closely aligned with those of shareholders.
For example, Mr Coombs’ £830m shareholding generated a dividend payout of about £40m last year. That’s more than 10 times greater than the £3.6m remuneration package he collected in 2019.
Ashmore has looked expensive to me in the past, but this year’s global market crash has seen the value of its assets fall. The group’s share price has fallen too.
At the time of writing, ASHM shares trade on 16 times 2021 forecast earnings, with a 4.5% dividend yield. In my view that’s good value for such a profitable business. I’ve been buying the shares in recent weeks and may well add more to my portfolio before Christmas.
