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Why I think HSBC shares are dirt-cheap right now

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The building of FTSE 100 bank HSBC in Singapore
Image: HSBC

When it comes to the financial sector, one stock really stands out to me as being dirt-cheap right now. 

HSBC (LSE: HSBA) shares have been a challenging investment to hold over the past 18 months. It is not just the pandemic that has weighed on the company’s stock. With its significant (and growing) exposure to China, the bank has become a proxy for investors who want exposure to the region.

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In recent months, Chinese policymakers have been clamping down on the companies and individuals they believe have broken regulations. This has sparked a sell-off in some Chinese equities. HSBC has not been able to escape. 

The bank’s share price tells the story. Over the past 12 months, excluding dividends paid to investors, the stock has added 30%. By comparison, shares in UK-based banks Lloyds and Barclays have returned around 75%, on average. The gap illustrates the discount investors are placing on stocks with exposure to China. 

But I believe this view is short-sighted.

Improve economic stability

The overriding goal of the changes China’s policymakers have instigated is to improve economic stability. They have been trying to reduce big companies’ control over personal data and limit the advantages wealthy individuals have just by being rich. 

While this has created an uncertain environment over the past two years, the changes could help economic growth by creating a fairer economy in the long run. 

China is already the world’s second-largest economy, and it is still growing. HSBC is one of the region’s leading banks and provides a valuable conduit between the West and China. This is the company’s competitive advantage.

No matter what changes Chinese regulators and authorities bring in, as the economy grows, the amount of money flowing in and out of the region will continue to expand. HSBC is in a unique position to benefit from this. 

Its position between China and the West is the primary reason I think the stock is attractive at current levels. In the long term, the lender should be able to reap the benefits of economic growth, and shareholders will benefit if this produces increased probability. 

Despite this potential, the stock is currently selling at a price-to-book (P/B) value of 0.7 and a price-to-earnings (P/E) ratio of 9.2. I think this low valuation gives no account whatsoever to HSBC’s competitive advantage. On top of this, the stock also offers a dividend yield of 4.7%. 

These are the reasons why I would buy the HSBC shares for my portfolio today. 

HSBC shares: risks on the horizon 

When it comes to risks, I am also aware that China is taking an increasingly hard line with Western institutions. This could have an impact on HSBC.

The lender has also faced fire from policymakers in the US for supporting the Chinese administration. At one point, analysts even speculated that it could lose its dollar clearing licence. Losing this licence would effectively cut it off from the US banking system.

However, this would be a significant shift in relations and seems pretty unlikely at this stage. 

Despite these risks, I still think HSBC shares are a great investment opportunity right now. 

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.

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