Although HSBC’s shares haven’t done well, I nevertheless think there is a buying opportunity here. Here are three reasons why.
Low interest rates
Due to Covid-19 and the resulting macroeconomic softness, interest rates are very low around the world.
In the US, the Federal Reserve has targeted interest rates around zero to boost the economy. In HSBC’s key profit centre of Hong Kong, interest rates are also low given that the territory pegs its currency to the US dollar.
Given that banks generally have an easier time making money from higher interest rates, HSBC’s stock hasn’t done very well as many investors don’t expect the bank to earn as much.
Although the Fed has suggested interest rates remain low for a while, there is nevertheless some reason to be optimistic on HSBC’s net interest margin rising in the future. Some market data, such as strong gold prices, hint at potentially stronger than expected inflation, which could prompt eventual interest rate hikes.
In fact, factors in the gold industry have been attractive enough that Warren Buffett’s Berkshire Hathaway has invested in a gold producer, Barrick Gold, this year.
If interest rates increase faster than expectations, HSBC shares could have a tailwind.
Race to the vaccine
Monetary and fiscal stimulus aren’t the only reasons to be bullish on economic normalisation.
Many experts expect the West to soon have an approved vaccine for Covid-19 by potentially early next year if not sooner.
It’s much needed. Not only will a vaccine save many lives, but it also will increase economic activity.
Once the macroeconomic climate is certain enough given a safe and effective vaccine, British regulators could allow HSBC to begin to pay a dividend again.
Given that many HSBC investors owned the stock for its dividend before, the bank paying a dividend again could help boost sentiment and potentially HSBC’s share price.
Another reason to be bullish on HSBC shares is technology.
Although it isn’t known for being a ‘tech company’ like Apple, HSBC nevertheless has made big investments in tech.
The bank has spent around $3 billion annually in recent years on its technology operations, which had around 40,000 employees in 2019. Management has also committed to spending billions annually on tech in the future.
With better technology, HSBC could potentially make smarter loans, make existing customers more profitable, and become more efficient.
Each of those things could help HSBC realise a higher return on capital and a greater bottom line. If expectations for higher profits increase, HSBC shares could increase as well.
Although HSBC hasn’t done well due to Covid-19, and it could still take some time before economic activity normalises around the world, I think HSBC shares are trading at low enough levels where the upside outweighs the downside.
For long-term investors, I think the prospects of normalising interest rates, an eventual dividend reinstatement, and tech improvements make HSBC shares a worthy investment.
Jay Yao 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.