Over the past six months, shares inHSBC (LSE: HSBA) have fallen by around 14% excluding dividends as the market frets about the banks exposure to emerging markets, China in particular.
And investors are right to be concerned about HSBCs exposure to Asias powerhouse. HSBC has staked its future growth on China to counteract slower growth in the US and the Eurozone. If Chinas growth starts to splutter, then HSBCs going to have a hard time conjuring up similar growth elsewhere.
Lower returns
Last year HSBC unveiled a grand plan to refocus its operations on China, specifically the Pearl River Delta area of southern China, which includes the mega city Shenzen and Hong Kong. As part of this restructuring, the bank is slashing50,000 jobs from its global headcount but increasing the number of workers it employs within China.
Along with job cuts,HSBC is looking to cut $290bn of risk-weighted assets from its global balance sheet, excluding China.Of these, management is looking to redeploy $150bn of assets into Asian markets.
Management has already started this redeployment, cutting$38bn of risk-weighted assets from the banks balance sheet during the third quarter. However, redeploying these assets is proving to be harder than the bank first imagined.
Indeed, as HSBCschief executive Stuart Gulliver explained on its third quarter conference call, HSBC has been forced to slow its redeployment of assets because of the slowdown in Asian economic growth. In other words, HSBCs relocation to Asia is now on hold.
Until economic activity picks up across Asia, HSBC has a big problem. The bank is shrinking itself outside Asia, but isnt growing inside Asia, the net result being that HSBC is shrinking in size overall.
With a declining asset base, HSBC will struggle to generate steady, consistent sales and profit growth as it has done in the past, which isnt good news for investors.
Outlook for growth
HSBCs future is tied to Chinas economic growth. However, Chinas economic outlook is becoming more depressing with every passing day.
For example, official plans call for slower growth in 2016 and beyond, with the 7.5% growth target reduced to 6.5%. Whats more, capital is rapidly fleeing the country, moving back into European and US assets. More than $500bn of overseas investment left China during the first eight months of last year.
Outflows acceleratedduring the last four months of the year and topped $140bn during December.China does have $3.4trn in foreign currency reserves to counter outflows butthese are being depleted rapidly. In the 12 months through November 2015, reserves fell by 10%.
Too late
All of the above is bad news for HSBC. China is no longer the unstoppable economic powerhouse it once was and HSBCs decision to go overweight in Chinabutunderweight in the rest of the world seems to have been madeabout 10years too late.
Still, this is just a roughassessment of China and HSBC’s prospects. Before making a trading decision, you should conduct your ownresearch to see if the company’s suitable for your portfolio and financial goals.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
