Standard Chartered (LSE:STAN) shares are up 22% over six months. That means if I’d invested £10,000 in the banking group then, today I’d be sitting on £12,200. That’s a very nice return for such a short period of time.
Sadly, I didn’t buy the stock back then. I can’t remember exactly why, but it probably had something to do with me moving to cash amid concerns about Trump’s economic policies. The six months since have shown us just how hard it can be to predict the market.
It was ready for a re-rating
I argued in January that Standard Chartered was simply too cheap. Late in the month, it was trading at 8.1 times forward earnings, representing a 35% discount to global peers.
What’s more, stock forecasts pointed to 12.1% annual earnings growth throughout the medium term. In turn, this resulted in a highly appealing price-to-earnings-to-growth (PEG) ratio of 0.67. This was a near-50% discount to the global financial sector average.
Moreover, Standard Chartered had a price-to-book (P/B) ratio of 0.76, representing a 40% discount versus the sector average. CEO Bill Winters also highlighted that the P/B ratio made no sense given the returns the company was generating.
So with the stock market surging since mid-April, it’s hardly surprising to see that one of the most undervalued banking stocks has also surged.
What about now?
Standard Chartered’s now trading around 10.6 times forward earnings. That makes it look more expensive that some of its UK peers, but it offers stronger growth forecasts albeit with a small dividend.
This forward price-to-earnings (P/E) ratio falls to 7.01 times by 2027 while the dividend yield rises from 2.3% to 3%. Remember, this is entirely based on today’s price and the forecasts for the company.
Is this good value? Well, I’m broadly of the opinion that UK banks are trading in line with each other. I’m not sure another re-rating is on the cards as UK banks are already trading higher than they’ve done in at least five years.
Re-ratings occur when the market changes its perception of a company’s value, leading to a change in valuation multiples. I’m not sure UK banks, even those with overseas operations, require a re-rating today.
Fast-growing economies: risk vs reward
Many investors like Standard Chartered’s proposition as it operates in fast-growing economies. This typically allows for outsized returns. However, it’s also a risk. It means the bank’s exposed to political instability, currencies fluctuations and weaker regulatory frameworks which can prove a real drag on business.
In theory, Trump’s tariffs should have been more of a drag on the bank. After all, developing-world economies typically have trade surpluses with the US. These are countries that have very little to offer a US administration hell-bent on equalising trade.
However, this hasn’t stopped the shares from kicking on. Looking forward, the stock could continue to perform well if the global economy isn’t too badly damaged by Trump’s trade policy. Time will tell. It’s on my watchlist and it deserves consideration from UK retail investors.
