The end of 2015 was a very turbulent time for investors. Indeed, during the last six months of the year, the FTSE 100 fell 5.7% wiping out most of the year’s earlier gains.
However, this year the index has got off to a solid start and is now up by more than 15% from the February lows.
Unfortunately, one of the index’s largest constituents HSBC (LSE: HSBA) has struggled to keep up with the rest of the pack. Year-to-date shares in HSBC have fallen 16.8% excluding dividends, compared to the FTSE 100, which has added 2.3% excluding dividends.
The big question is now: will HSBC continue to underperform the wider FTSE 100 or will there be a sudden surge in demand for the bank’s shares?
Tracing HSBC’s troubles
HSBC’s underperformance can be traced to China. Concerns about the state of China’s economy have weighed on almost all companies with exposure to the region this year. Moreover, the market is also worried about the prospect of lower or even negative interest rates, which would severely impact HSBC’s income. In fact, concerns about where interest rates will go next are weighing on the entire financial services sector. The global banking sector has been one of the worst-performing sectors in markets around the world so far this year, and many US banks now trade at a discount to tangible book value.
So, HSBC isn’t the only bank that’s lagging the wider market this year, but it does have the largest monetary exposure to China of any Western bank. It’s likely that the bank’s massive exposure to Asia’s largest economy is just as concerning for investors as worries about where interest rates will go next.
Convincing will take time
It will take some time for China to convince the markets that its economy isn’t about to fall off a cliff. Debt levels will have to come down significantly and growth will have to stabilise before investors consider returning to the region. This could take several years to unfold. Meanwhile, there seems to be no relief on the horizon for savers and banks who require higher interest rates to achieve better returns on investment. All in all then, it’s likely it will take a few years for investors to trust HSBC again.
Still, HSBC remains one of the FTSE 100’s dividend champions and while the bank’s shares may not return much in the way of capital growth in the near term, you’d be hard-pressed to find a better income investment.
Right now HSBC’s shares support a dividend yield of 7.8%, and the dividend payout is covered 1.3 times by earnings per share. What’s more, the bank’s management has stated its commitment to the dividend and a few weeks ago declared that it would take another major financial crisis for the board to consider cutting the payout.
