During September, HSBC (LSE:HSBA) stock jumped by just over 10%. This compares to the FTSE 100 index, which rose by 1.4% over the same period. Therefore, the outperformance was stark, with good reason for it. Here’s what contributed to the rise and what it means for the HSBC share price going forward.
Reasons for the jump
One story that caught my eye towards the end of the month was news about a very unique trial with IBM. It’s using quantum computing algorithms in a world-first trial to aim to make trading more efficient for its employees. Initial results showed a 34% improvement in predicting bond trade execution compared to standard methods.
Even though using such advanced technology is still far away from being widely rolled out, this kind of innovation is a signal of competitive advantage in trading infrastructure and technology, which tends to excite investors.
Another factor that helped the stock was a continued economic recovery in Asia. As a global bank, HSBC has one of the largest exposures to this continent versus other peers. This is particularly true when it comes to the wealth management division. Therefore, if clients are doing better financially in Asia, it should help to feed through to higher demand for HSBC services. In turn, this could translate into higher revenue for future earnings reports.
Further, I think the share price is benefitting from continued share buybacks. The bank has committed to a multi-billion-pound buyback package, which is ongoing. If the company is a large buyer of its own stock, we could assume that management believes it to be undervalued. It can thus create a spiral that acts to send the share price higher, as other investors buy as well.
Direction from here
A big factor to consider going forward is that HSBC’s chair, Mark Tucker, is stepping down earlier than expected, leaving a temporary leadership vacuum in a very critical role. Even though the management team has known about this for a few months, it hasn’t found a permanent replacement for him yet. This isn’t a great sign and could cause some investor concern in the short term.
Another risk is the lower interest rate policies that several major central bank committees are pushing at the moment. For example, the US Federal Reserve cut interest rates in September. If this path continues over the coming few months, it would act to lower the net interest margin for HSBC. Put simply, the profit margin it makes from the difference in lending money versus paying on deposits shrinks as the base interest rate falls.
Plenty to still like
I think one of the most significant factors in favour of the stock is the valuation. The price-to-earnings ratio is just 11.24. Even though it’s above my benchmark fair value figure of 10, it’s below the index average of around 16. Therefore, I think the rally could keep going before it starts to get overvalued. On that basis, I think it’s a stock for investors to consider.
