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Why I rate the HSBC (LON:HSBA) share price as a top hedge against Brexit

A friend of mine has some HSBC Holdings (LSE: HSBA) shares, which he’s had for decades. In fact, they were originally Midland Bank shares that he got from his dad, and he’s always said that while he doesn’t need the cash, he’s just going to keep them until he retires.

Buffett style

I asked him not long ago how they’re doing, and he told me he has no idea and only looks at them whenever he gets his regular dividend letter. I think that’s a great attitude towards shares, and it brings to mind Warren Buffett’s advice to invest as if the market is going to close for the next 10 years.

But that dividend letter brings up the other half of my friend’s investing stance. HSBC is one of those companies that offers a scrip dividend scheme, in which shareholders can take additional new shares instead of cash. He chose that option because, as he says, dividend cash is money he never had and won’t miss, so why not convert it to new shares and let them accumulate?

Banking troubles

HSBC, as one of the world’s major banking corporations, has certainly had its share of pain from the travails afflicting the global financial system. It wasn’t as badly damaged as the UK’s domestic banks during the banking crash, with so little of its business coming from these shores or the Americas, and the bulk of it focused on Asia.

But a slowdown in Chinese growth had brought its issues, and any global disturbances between East and West are damaging too. But after a few tough years, HSBC got itself back on track in 2017 and 2018, and there’s a 15% rise in EPS predicted for the current year — along with a dividend yield that’s up to 6.5%.

Better than UK banks?

We’re looking at P/E of 11 based on current forecasts, and that might look scarily high to some banking investors. By comparison, Lloyds shares, together with those of RBS and Barclays, are on P/E multiples of around 7 or 8.

But that highlights another of HSBC’s advantages. Our big three UK-centric banks could be severely hit depending on how badly we come out of Brexit. Even with a deal they’ll suffer, as the envied position of London as the centre of European banking has been thrown away — and I bet those in Frankfurt and Paris can hardly believe their luck.

And if we leave the EU with no deal (which, despite recent parliamentary progress, is still a significantly possibility with the PM’s “dead in a ditch” rhetoric), the UK economy and the banking sector along with it is likely to be hammered.

Worth more

That’s why HSBC deserves a considerably higher valuation rating, as it’s almost completely impervious to whatever happens in the UK, or in the EU, whether we leave, remain, get a deal, or not.

And though we may well see some volatility in Chinese markets, which isn’t really surprising when we’re talking about a country with annual economic growth that is still around 6%, being in growing economic regions rather than the sinking UK and Europe is surely a recipe for long-term profit growth.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.