Why I think HSBC shares might still be too risky for comfort

I am not yet convinced by banking giant HSBC Holdings plc’s (LON: HSBA) big dividend or recent lower valuation.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a strong January in broader markets, I would like to discuss  why I am not ready to invest in the shares of HSBC Holdings (LSE: HSBA).

As a global bank, about three-quarters of the group’s profit comes from mostly corporate clients in Asia. In October 2018, the group delivered a robust set of earnings results. But despite the recent growth in both the top- and bottom-numbers, I feel that investing in this banking giant comes with domestic and global risks.

Continuing Brexit drama

As the official Brexit date of 29 March approaches, the UK faces more uncertainty: we just do not know how we will leave the EU. If the country crashes out without a deal, the initial reaction of the UK stock market will likely be a sharp fall and UK financial shares will remain under pressure.

In the case of a disorderly departure from the EU, British banks and other financial services firms will suffer decreased access to the single market and will also begin to lose their competitive edge in Europe compared to their EU counterparts.

Although HSBC has an international focus more than a domestic one, it is still making preparations for a no-deal Brexit. Like many other UK banks, to continue to have full access to the EU, the group has been moving some of its operations, assets and staff to these countries, mostly to France. All of these extra preparations have been increasing its costs, a fact that obviously affects earnings.

And as Brexit breaking news headlines continue to hit the wires, consumer confidence and investor sentiment regarding the fate of the UK economy will continue to ebb and flow for several more months. The fortunes of banks are closely linked to the overall health of the UK economy and any potential downturn in the economy will hit their bottom line and share price.

It would not be realistic to expect the bank’s share price to be immune to further pressure if the sector suffers. Therefore, until we have more clarity on the next phase of political negotiations, I would wait and see.

Slowdown in China

But isn’t HSBC ‘protected’ by higher exposure to Asia? Recently, the International Monetary Fund (IMF) warned that China, the world’s second-biggest economy, has been slowing considerably. This development would likely translate into falling corporate client demand, decreasing intermediation margins and slower revenue growth for the bank. Indeed HSBC’s exposure to Hong Kong and China has been worrying investors for months and over the past year, the shares have fallen 20%+.

The bank’s P/E ratio is over 14 and its dividend yield stands at 5.1%. Although value investors may be encouraged by these numbers, banking is a cyclical industry — when we have so many question marks about the global economy, it is hard to make a bull case for the sector.

Financials become attractive when the economy takes off, not when it slows down. Therefore, investors should evaluate the bank’s P/E ratio with macroeconomic realities in mind. In recent years, analysts have been lowering the valuations for banking stocks. The fact that HSBC has not increased dividends since 2013 adds to the worry that the shares are not ready to go up.

The bottom line

Markets suffer during times of uncertainty. Therefore, I would avoid committing my capital to this cyclical banking stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »