As the world starts to move on from the coronavirus pandemic, I’ve been looking for recovery plays to add to my portfolio. The HSBC (LSE: HSBA) share price is one such.
The Asia-focused bank is, in my view, one of the best ways to invest in the region’s economic growth. That suggests to me that as we move on from the crisis, the stock could be a recovery play. As such, I would invest a large sum, as much as £5k, in the lender right now.
The HSBC share price opportunity
While HSBC is listed on the London market, it isn’t really a UK company. It has a UK business, but this is tiny in comparison to the group’s Asia division. This division is only going to expand.
Management is targeting Asia for growth as the bank is struggling to gain market share in other regions. To that end, the firm is in the process of shifting as much as $100bn in assets to Asia. As many as 35,000 jobs will go in other markets as part of this shift.
According to reports, discussions to sell HSBC’s French business, which employs around 10,000 staff are well advanced. Management is also planning to divest the group’s US retail business.
I think all of these changes will help the HSBC share price in the long run. The businesses the bank is offloading are challenged, to say the least. For example, in 2018, HSBC’s retail banking and wealth management business in France lost $56m, up from a loss of $12m in 2017. I don’t think it makes sense for the lender to keep this business if it will keep losing money.
By exiting non-core, loss-making businesses, HSBC can free up capital to move to Asia, where returns are higher. This should translate into higher shareholder returns over time. Also, operating costs tend to be higher in developed markets. In a world where interest rates are close to zero, banks need to do everything they can to boost profits. Cutting costs as far as possible is one option. That’s why I think it makes sense for HSBC to exit these expensive markets.
Risks and challenges
That said, the shift to Asia presents some challenges as well as opportunities. The Asian banking market is highly competitive, and it’s only becoming more so. HSBC may struggle to maintain a competitive advantage in this booming market.
At the same time, the group’s shift away from Western markets may put some customers off. The organisation can no longer claim to be the world’s local bank if it does not have a presence in key European and North American markets. Therefore, these disposals could hurt HSBC’s reputation making it harder to compete in the Asian markets.
Still, despite these challenges, I think the HSBC share price could be a great way to invest in the global economic recovery. That’s why I’d invest £5k in the stock today. As well as benefiting from the recovery, I think the bank’s bottom line will receive a boost as the group exits loss-making markets. This could provide another tailwind for the stock.
Rupert Hargreaves owns no share 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.