Covid-19 has hurt HSBC (LSE: HSBA) a lot. Because of the pandemic, the bank has had to take billions in additional loan loss provisions. Regulators pressured the bank to suspend its dividend at a time when many investors needed payments the most. HSBC has also had to postpone some of its restructuring efforts.
As a result, HSBC stock has fallen substantially. Year-to-date, shares of the bank are down 37% at the time of this writing.
Lately, however, the bank’s stock has rebounded from its lows. Shares are up around 30% from their lows in late September.
Although the bank has rallied for a number of reasons, I believe a few factors are especially important. Here are two factors why I think HSBC has rallied since late September.
Although Covid-19 cases have surged in many parts of the West recently, I think HSBC stock has done well since September because the market is generally optimistic. It looks ahead and expects a brighter future. I think the market is reacting to progressively more positive expectations for a potential Covid-19 vaccine.
Earlier in the year, I reckon vaccine expectations were rather low. A vaccine for a major ailment has never been developed and approved within a year. As a result, few expected a potential initial vaccine to be very effective or to be developed very quickly. Without a vaccine, it seemed unlikely that the world economy could recover quickly.
As the year progressed, however, news about vaccine candidates around the world became more optimistic.
Recently, Pfizer, in conjunction with BioNTech SE, released rather promising efficacy results for their potential vaccine candidate. The news has made many investors even more optimistic.
Once a safe and effective vaccine is approved and distributed widely enough, I reckon the world economy could grow rather quickly. Given the massive amount of fiscal and monetary stimulus at work, I think there is potential for upside surprise.
If the global economy grows faster than expected, HSBC’s earnings could also grow faster than expected too, in my view.
Given HSBC’s low price-to-book ratio, I still think it remains an attractive long-term investment option.
China’s economic growth
Another reason I think HSBC stock has rallied is that China’s economy is recovering rather rapidly.
Greater China accounts for a big part of the bank’s business. In 2019, Hong Kong accounted for 90% of HSBC’s pretax profits. The bank itself hopes to expand further in mainland China given the huge market and rising incomes there.
Because the latest economic data from China has shown that the country has returned more or less to normal, I think the market has become more bullish on HSBC’s ability to continue to make profits in the area.
If China’s economy could recover rather quickly once the virus was contained there, I think the world economy could do the same once a vaccine is adequately distributed. If that happens, I reckon HSBC’s ex-Greater China operations could also see an improvement in financial results.
The post HSBC: Two reasons why I think the bank has surged recently appeared first on The Motley Fool UK.
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.
Motley Fool UK 2020