I’m backing the HSBC (LSE: HSBA) share price for 2021. After a rough 2020, I think the stock’s cheap. With the outlook for the UK economy improving, I reckon shares in the lender could generate a rapid recovery in the year ahead.
HSBC share price headwinds
Research shows that buying stocks when they’re trading at depressed levels can be the most profitable strategy in the long run. That’s why I try to follow this tried-and-tested method of investing.
However, I believe it’s essential to understand why the stock’s trading at such a low level before I buy.
When it comes to the HSBC share price, I think the company is facing several headwinds. Like many banks, the group is struggling with low-interest rates.
The core of any bank’s business is lending money, and if it can’t lend at high-interest rates, then profits come under pressure. HSBC could increase interest rates charged to customers, but then it might lose these customers to other lenders.
Low-interest rates have wiped out the lender’s income in its European and UK markets.
Hong Kong issues
Unfortunately, HSBC has other, potentially more significant problems to deal with as well.
The organisation generates the majority of its profit in Hong Kong. This is a critical market for the business. But due to political tensions, risks to the group’s business in this region are increasing. If the lender were to be locked out of this market, the impact on the HSBC share price would be devastating.
Luckily, it doesn’t look as if that’s going to happen.
Management has been taking action to remedy the above problems over the past 12 months. Thousands of jobs have been cut, and HSBC has closed operations in unprofitable markets.
This is all part of the group’s plan to return to a core business model, focusing on what it does best without diluting resources. Over the long run, I reckon there’s a high probability this strategy will pay off.
HSBC isn’t the only bank suffering due to low-interest rates. Many of its competitors are as well. And they’re taking similar action, withdrawing from overseas markets and cutting staff. In my opinion, this is only going to reinforce HSBC’s competitive position as the world’s most international bank.
Therefore, I believe if the lender can successfully double down on what it does best, the future could be bright for the HSBC share price.
In the meantime, the bank looks set to resume its position as a FTSE 100 income champion. Management has said that, when regulators allow, HSBC will reinstate its dividend. Analysts are forecasting a potential yield of between 4% and 5%.
Thanks to this income, investors will be paid to wait for the group’s turn around. So, after considering all of the above, I think the HSBC share price offers a desirable level of income and capital growth potential compared to other blue-chip stocks.
The post Why I’m backing the HSBC share price for 2021 appeared first on The Motley Fool UK.
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.
Motley Fool UK 2020