Here’s why I’d back the HSBC share price for 2021

If the bank can capitalise on the global post-pandemic economic recovery, the HSBC share price could stage a recovery in 2021.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

As a value investor, I’m always on the lookout for companies that might be undervalued. As such, I’ve recently been taking a closer look at the HSBC (LSE: HSBA) share price. So would I buy?

Shares in this banking giant have come under pressure over the past 12 months. There’s no one apparent reason why this is the case. However, I believe there’s a range of reasons why investors have been selling HSBC.

The two most important, in my opinion, are the bank’s exposure to China and record low-interest rates. 

HSBC share price challenges 

HSBC’s exposure to China used to be a competitive advantage. The Chinese economy is enormous and growing rapidly. HSBC already generates more than two-thirds of its income in Hong Kong, and management has been trying to push the business more towards Asia for the past few years.

But China’s recent actions to suppress democracy in Hong Kong have attracted criticism from policymakers worldwide. Unfortunately, HSBC has been on the wrong side of this argument.

Simultaneously, the bank’s bottom line is under pressure from low interest rates. Any bank’s basic business model is to take deposits from customers and lend this money to borrowers.

The bank’s profit is the difference between the interest rate and pays depositors and charges borrowers. But with interest rates where they are today, lenders can’t charge borrowers enough to make a substantial profit. HSBC’s net interest margin, the difference between the rate it pays depositors and charges borrowers, was just 1.2% in the third quarter of 2020. It was 1.7% in 2018

These are the main challenges the HSBC share price faces. If the net interest margin continues to decline, profits will continue to fall. What’s more, if relations between China and the West continue to deteriorate, HSBC’s reputation may take a further hit.

Opportunities 

On the other hand, I see plenty of opportunities for the group on the horizon. An economic recovery after the pandemic could lead to rising interest rates, which would be great news for the lender’s bottom line.

Also, if relations between China and the West stabilise, HSBC is in a unique position. It’s one of the few lenders with a large presence in both markets. This gives the bank an excellent competitive edge over peers and could help its growth if China’s economy continues to expand. 

I’m also attracted to the HSBC share price due to its valuation. At the time of writing, shares in the lender are trading at a price-to-book (P/B) value of 0.7. That’s compared to the long-term average of 1.2. This number suggests shares in HSBC are undervalued, although I think it also reflects the risks facing the bank as outlined above. Still, if investor confidence returns this year, the market could overlook these challenges. 

All in all, I think the HSBC share price looks cheap compared to its historical valuation. But this doesn’t mean the stock is undervalued. It’s facing many difficulties, and the lender needs to overcome these challenges. Only time will tell if the group can make the most of the competitive advantage of its international footprint. Still, I would buy the stock for 2021 considering its opportunities. 


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

ISA Individual Savings Account
Investing Articles

How to build a Stocks and Shares ISA with a 6% dividend yield

It’s easy to build an investment portfolio with a high dividend yield today. But investors need to manage risk carefully,…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

How risky is switching from cash savings to a Stocks and Shares ISA?

The UK government is making moves to encourage cash savers to consider investing via Stocks and Shares ISAs. But what…

Read more »

Friends and sisters exploring the outdoors together in Cornwall. They are standing with their arms around each other at the coast.
Investing Articles

4,985 shares of this FTSE dividend star pay an income equal to the State Pension!

Zaven Boyrazian calculates how many shares investors would have to buy to generate enough income to match the UK State…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

£500 buys me 407 shares in this 8.2%-yielding income stock!

Got a small lump sum? Zaven Boyrazian explores one underappreciated income stock offering an enormous yield that could be set…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Up 23% this year, is it too late to buy shares in this FTSE 100 compounder?

Having missed Diploma shares at £36 back in April, is a strong trading update with higher guidance a good enough…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

Does this ex-penny stock have the potential to almost double?

This under-the-radar mining stock has doubled in the last 12 months, lifting it out of penny stock territory. But could…

Read more »

A mature adult sitting by a fireplace in a living room at home. She is wearing a yellow cardigan and spectacles.
Investing Articles

£5k in savings? Here’s how that can unlock a £255 monthly second income

Ever wondered how to turn a lump sum of savings into a chunky second income? Zaven Boyrazian explains a simple…

Read more »

British pound data
Investing Articles

Get ready for a US stock market crash?

Experts are waving the red flag on the US stock market and economy, warning of an impending crash. Should investors…

Read more »