The HSBC (LSE: HSBA) share price has been moving up since the end of October. And at the recent level near 499p, it’s around 13% higher than it was back then.
My initial broad-brush view is that the move higher makes sense. Banks are cyclical businesses. And bank stocks are known for their tendency to be among the first to plunge when general economic conditions deteriorate. But they are also some of the first to move higher when the green shoots of recovery appear. And to my reading of the situation, the economic and geopolitical news has been improving.
Good fundamentals
On top of that, higher interest rates are good for traditional banking businesses. And that’s because they can lead to better profit margins. But bank businesses tend to thrive when markets and economies are buoyant. Indeed, prosperous banking customers can drive good business for banks.
Meanwhile, the fundamentals seem to support my positive view of HSBC’s immediate prospects. City analysts have pencilled in earnings increases between 10% and 20% for this year and next. But the valuation remains modest. The price-to-book value is well below one and closer to 0.8. And the forward-looking dividend yield is running at a chunky-looking 7.5% or so for 2023.
On 25 October, the bank kicked off the recent trend higher by releasing a positive third-quarter trading update. Chief executive Noel Quinn said the HSBC business maintained “strong momentum” in the third quarter. And there was organic growth in all three of the firm’s global businesses.
For background, HSBC is one of the world’s largest banking and financial services organisations. And it serves around 40m customers via its three divisions of Wealth and Personal Banking, Commercial Banking, and Global Banking & Markets.
Quinn confirmed that the company’s net interest income increased because of rising interest rates. And despite inflationary pressures, the company kept “a tight grip” on costs. Looking ahead, the immediate outlook is positive and HSBC appears to be firing on all four cylinders right now.
Long-term cyclical challenges
But that’s not the whole story. Scoping back from the cut and thrust of today’s economy and markets, it’s clear the journey for HSBC has not been straightforward. And the company’s troubled trading history reflects in the share price chart. For example, over the past year, the share price has moved around 13% higher, but not in a straight line. And over 10 years, the stock has actually fallen by 22% or so.
And a quick glance at the multi-year financial record reveals a patchy performance with earnings, cash flow and shareholder dividends. In my opinion, HSBC is slave to the cyclical characteristics of its banking and financial business. And for me, that means the stock will never make a decent buy-and-forget investment.
Things look promising for HSBC shareholders right now. And if I had spare cash I’d be buying the shares — rightly or wrongly. But this is one of those rare occasions where a long-term investing mindset makes little sense for investors.
