The stock price of the bank seems likely to continue rising as it is strategically located in Asia. The bank has an edge over the American and European counterparts, since its history is closely tied with the Asian territory of Hong Kong. Dividend advantage aside, the company has chosen a timely and strategic move to focus its business on the fast rising Asian markets. The American and European markets are not set to recover anytime soon from their financial problems. The American economy has just experienced the real estate bubble which caused the worldwide recession we are facing at the moment (Landon 2009). The European market is also besotted with liquidity problems of its own, particularly, Greece.
HSBC has almost half of its revenue coming from the Asian region which enabled it to survive the losses from the sub prime bubble from the American operations. They were the first ones to have suffered tremendous losses from the sub prime mess. They only have the advantage of having diverse operations that is why they are able to sustain the massive loss from the real estate crisis.
The continued growth in the Asian region coupled with the fact that the American and the European economy is not going to recover anytime soon, pushed them to move the center of their operations to the Asian region. This has been symbolically indicated by the change of residence by its Chief Executive Officer to Hong Kong. They were previously based in London, Werdigier (2009). The change of focus in terms of the target market, however, is on a long term basis as it is already a trend that will last for a considerable time span.
The lack of established banking and financial products in China and other Asian nations makes this region a very attractive target for HSBC and other firms in the financial industry. This means a considerable growth potential for HSBC for a long time to come. It would mean a sustained growth in its earnings potential that will also entail a continued positive evaluation of its stock price. The top of the share price is not yet going to be seen. The PE multiple has already reached a very high level, since it is now highly unprofitable to buy HSBC shares. The major reason for this has been their loss of earnings in the American business segment. There are still numerous investors that are buying the companies shares despite the extremely high price of their stock.
The recent trend of HSBC also points out the start of a reversal in their bad debt experience (Reuters 2010). They have been saddled with unpaid loans for several years already, but the situation has finally started to improve. The banks policy of stopping the sub-prime losses has finally paid off. This is another reason for the banks performance to improvement. Automatically, it would also trigger higher stock prices as investors see it as a sign of strong fundamentals for the bank.
There will be plenty of opportunities for HSBC in the Asian region to sustain its stock price growth for a long time in future. China alone has already started to buy large amounts of raw materials and commodities to ensure its continued industrial expansion. Metals as well as commodities are consumed by bulk by Chinese firms and its government. They are strategically posing themselves to have access to a variety of raw materials in the event that the supply would be compromised. This is especially true with rare metals and energy supply.
They need copper and iron to provide the electrical distribution system required to fully sustain the industrialization (Burgos 2010). They cannot afford to have interruptions in the oil supply for their electrical needs. They are already gearing toward alternative energy sources just like the rest of the world.
All of these factors mean more business opportunities for HSBC. The bank is poised to be able to take advantage of the capital inflows from the American and European economies to China. HSBC is already deriving almost half of its revenue from Hong Kong alone. They have the resources as well as the aptitude to expand their scope in the Asian region exclusively. They may not be the only foreign bank targeting the emerging economies of Asia but there is plenty of space to provide a healthy profit for everybody. The financial services industry of China as well as other Asian countries is also underdeveloped or non-existent at all. All of these constitute impressive opportunities for a multinational entity like HSBC to win a considerable market share while the opportunity is still there.
There is also another additional source for HSBC. The constant exchange of goods from the Asian and the European countries means a healthier economy for the Asian countries. The middle class is increasing as well as people with high net income (Wan 2010). All of these are ripe ingredients for staging a profitable business environment for the bank and its services. The healthy interaction of Asian nations with the rest of the world means impressive opportunities for the bank to cater to their financial transaction needs. Related fields like asset investment as well as capital management services will also add to revenue sources of the bank.
The volatility of the stock price, on the other hand, has been extremely skewed by the recent worldwide recession. The HSBC has been enjoying a steady increase in their share prices from 2003 to 2007. The peak of the increase was noted in 2008 and then the prices dropped sharply at the beginning of the 2009 when the global crisis reached its climax. The volatility of the stock price should be carefully measured in terms of the time period (Alibaba 2005). If we are to measure the beta coefficient or the volatility of the stock price excluding the worldwide crisis, the stock price would naturally exhibit higher volatility. It would change dramatically, however, if we are to analyze the stock volatility without the recent crisis effects.
The calculations would show that the beta coefficient would be better than the 1.24 ratio it is showing right now as of 2010. It is better to apply a long term approach when trying to analyze the volatility of a blue chip stock like that of HSBC. It is important to note that the bank has seen steadily increasing returns on its capital investments. Their share prices have risen significantly from the pre-2003 period to the highest level it reached at around 2007. It is only the worldwide credit crisis that has sent its share prices plummeting downwards. Nevertheless, the bank continues to be a thriving and healthy financial institution simply because of its capacity and scope of operations.
In simple words, the bank continues gaining steady market share prices in the Asian region due to their roots and familiarity with the business climate there. They might be hurt by their position in the American sub prime mess but it is only a matter of time before they recover. The kind of recovery they will have will take some time since the losses were massive. Their sound decision to stop focusing on the American and European side of the business segment however would create bigger returns for them without the same risk presented by sub prime like before. They have not conquered the whole Asian market yet, since it is a relatively untapped market.
It is not only China that will trigger the kind of growth that HSBC will experience from entering the Chinese financial industry (Lo 2007). Most Asian countries are fast growing economies simply because they have not fully matured to become first world countries like America.
Another thing that can influence the share prices of the HSBC stock is the mounting pressure on the Chinese Renminbi to appreciate in value. The Chinese government has always pegged their local currency to the dollar to ensure they will always be lower than they really should be. It gives them unfair advantage in terms of trading with the United States.
HSBC on the other hand will stand to benefit from the situation since they are heavily dealing with Chinese currency. It does not matter what will happen to the US dollar since they are in the position to take advantage of the potential events. As the Chinese economy continues to grow, Renminbi will continue to appreciate as it should be in the first place. The increase in value of Renminbi will also increase the value of the HSBC holdings. HSBC has already started to pay more attention to the Asian region and their exposure to the local currencies such as Renminbi will undoubtedly go higher in value. This factor might take some time to bring the intended effect, but it will undoubtedly increase the stock price of HSBC when it does come to fruition.
On the other hand, the American economy is in danger of inflation due to the massive stimulus programmes their government has implemented (Radcliffe 2006). It is advantageous that HSBC has started to lie low on their American and European operations. This has the opposite effect on HSBCs share price though. If the American side of the business of HSBC goes down, it will reflect negatively on the companys performance. Naturally, the side effect of low earnings will also mean lower share prices for HSBC. The contrasting effect of Chinas increase in value as a source of revenue and as a currency for HSBC will balance the negative effect of the American economy. The extent of which side will have a bigger effect on HSBCs earnings, however, is anybodys guess.
The situation is very complicated and very sensitive to any slight reversal that it is impossible to predict what the final result will be on HSBCs profitability. What is beyond any doubts is that the American economy will recover, but it will never be the same, as the majority of their manufacturing and other white collar jobs have been outsourced already. The kind of recovery that will happen would be a jobless one.
There are many predictions in fact that the American economy would return to its pre-recession level in at least seven years. This may or may not be true but the fact remains that the American economy will never be the same again. The constant factor, however, is the kind of flexibility that HSBC has created for itself (Jim Collins 2003). They are capable of operating in both the American and the Asian region. No matter what kind of economic situation, HSBC stands poised to take advantage of the economic activities these thriving economies will require of them.
The exposure to other currencies will also mean better hedging for HSBC in terms of risk. If one currency falls in value, there is another one that will cushion the impact. For sure, the activities of HSBC in a broad spectrum will allow them to weather any temporary adverse situation experienced by one of their sources of revenue. There is a risk however for HSBC, if they are to hold all of their position in American dollars.
Since the threat of inflation is always present as a result of the governments massive stimulus programme, they might decrease the value of their holdings as well. It is already well and good that HSBC has started to focus more on other foreign currencies like the Chinese Renminbi. In case HSBC has not hedged itself against a possible fall of the dollar, their share prices will undoubtedly suffer as well. This is the same situation with the Euro currency they are exposed to as well. It is already well known that Greece is one of those that have a very bad credit reputation (Jim Collins 1994). It is likely that these countries will contribute a lot to decreasing the earnings of the company.
The only redeeming factor for HSBC in this situation is the move to shift their focus away from the American and European economies. These are already mature markets and suffering from the lack of exciting growth prospects. HSBC would be exposing itself too thinly if they are to place all of their assets in these markets. The strategic move to Asia would not only increase their chances of capturing the exciting growth prospects there, but also shield them from unwanted inflation any single nation might experience. It is a sound decision for them to have shifted their focus of attention.
All in all, the diversity of its holdings will enable HSBC to maintain if not increase their earnings on a steady basis. The only question that remains is how fast they are in adapting to changing consumer demands and economic markets. They either benefit from the situation or get damaged from reacting slowly to the changing circumstances. All of these would reflect in the share price of HSBC. From the looks of what they are implementing, they are doing the right thing in focusing on the Asian markets. Their share price is indeed poised to continue going up.
Another factor that should be considered is the globalization (Graham 2004). The outsourcing business is here to stay and that means more growth for previously weak and small economies in Asia. As these economies grow, their potential for the revenue growth also means much for HSBC. Jobs in sales, web design, admin assistance and accounting are all outsourced now to these cheap labor markets. It would mean a higher number of the middle class and more potential clients for HSBC.
The wire transfer needs for capital and salary crossing the globe literally would be a considerable source of revenue for HSBC also. Small and medium business that will spring from these bigger drivers of the economy will also need international money transfer services and payment options. All of these are rich grounds for HSBC to start tapping into. The increase of individuals with high net income would also mean more clients for investment products. Insurance as well as pre-need plans are going to have more room for growth.
If we are to consider HSBC as a company however, they also present strong leadership skills as well as business savvy. Although they have been blessed with tremendous growth over the last few decades, it has unfortunately led them in buying a company engaged with sub prime shares. Now that the rest of the world knows this brings losses, they have started shifting their attention back to their Asian roots. The business organization is enjoying a relatively efficient decentralized command. They are fast and nimble in adapting to their respective territories. Their business strategies are also well attuned to the modern tendencies.
All of these factors are what makes it a strong business (Graham 2006). They have great fundamental business advantages that allow them to weather whatever adverse economic conditions there is. Their management is well experienced and they also have adept staff in all local branches. Their size alone makes them capable of committing big capital investments with other business entities. Their asset management business is also competitive. Their credit card is also one of the biggest in the world. The transaction fees from this alone is already generating them a healthy return on investment.
All in all, HSBC has the flexibility and the range to take advantage of the economic terrain. They might have encountered some failures in the form of the sub prime business, but they are quick to react and prevent further losses. The management team is also experienced and seasoned veterans. The general economic climate is also something that will ensure prolonged the growth well into the future. All of these factors point to steady increase in earnings for HSBC and ultimately to an increase in their share price as well.
The market may react to Wall Street reports, but the steady rise in earnings for HSBC will only mean that the market will adjust itself and regain the steady momentum for share price increase. Its the current PE ratio is already undesirable for any value investor. It still provides some sort of inflation protection for an investor with a massive capital. If you want a better return, you should wait for it to drop in share price lower but the current situation does not give any indication that it will return to its recession level prices anytime soon. Any investor wanting to hold a long term stock should buy the HSBC stock now before it reaches higher levels that would make it unprofitable.
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