Playing Emerging Markets Through Western Blue Chips: HSBC

Feb 24 2014, 7:20am CST | by

Investors today face a quandary with emerging markets. Sentiment towards them is bearish, and has been for some years now, with far greater faith in developed economies than developing. But at the same time, there is no denying that emerging markets, with their high populations and strong demographics, will be the engines of global growth in years ahead.

While investors grapple with the question of when it will make sense to re-allocate assets to emerging market shares in expectation of a rebound, there is another way of gaining exposure to developing world growth rates without having to deal with local, falling stock markets. One common approach is to buy a western blue-chip that gets a lot of its profits from the emerging world. US fund managers tend to refer to Coca-Cola as an example of this, while Europeans talk about Nestle and Australians mention BHP Billiton. In all cases, the principle is the same: a Western-domiciled business, with all the familiarity and security that comes with that, but an earnings model built on the emerging world.

In an occasional series, I will be looking at stocks that allow investors to do this, starting today with HSBC, which this morning released its annual result for 2013. If you’re interested in studying this in depth, click this link and then download the PDF available on the right of the page, ‘presentation to investors and analysts’.

If you look at page five of this analysis, you will see just how clearly the HSBC model is based on the emerging world, and in particular Asia. HSBC is, strictly speaking, a British business; that’s where it is legally headquartered. But anyone who knows the bank well understands that its spiritual home is at 1 Queen’s Road Central, where the extraordinary Norman Foster-designed HSBC building, its coathanger braces suspending curtains of glass above a cavernous atrium, overlooks Statue Square while stoic stone lions stand guard. As the numbers on this page show, Hong Kong accounted for more than a third of underlying profit before tax in 2013, and the combination of Hong Kong, the rest of Asia, MENA (Middle East and North Africa) and Latin America together made up $17.2 billion of the total $21.6 billion total underlying pre-tax profit. We can argue about whether Hong Kong should still be considered an emerging market, but we can say that a shade under 80% of the bank’s profit comes from outside of North America and Europe.

HSBC is amid a transformational strategy under chief executive Stuart Gulliver which has largely involved the sale of a lot of non-core businesses – 63 of them since 2011 – as well as a focus on cost efficiency and a change in the way the whole business is organized. You can see more about this on page 16, but what is perhaps most striking on this page is the fact that, from the 2010 to 2013 financial years, Latin America, Hong Kong, Asia and MENA revenues are up 21%. These might be difficult markets at the moment, but HSBC is demonstrating that they can drive considerable growth. Flip a page further and you see the strategic priorities from now to 2016, and the very first one is to continue to shift assets into higher performing businesses, which it considers to include the Pearl River Delta (that is, the area embracing Hong Kong and the wealthy southern cities of Shenzhen and Guangzhou), Asean (the Association of Southeast Asian Nations), renminbi internationalization (the steady opening of the Chinese currency to international use) and trade, which is increasingly being driven by the emerging world.

Investors tend to like HSBC as a play on the emerging world for several reasons. One, most obviously, it’s from the emerging world, and no matter where the official head office is, HSBC has made its name from more than a century of immersion in Asia, building a deep local presence wherever it goes. True, it has recently shut down some of these businesses, such as a large part of the leading Islamic finance business it used to boast, but the fact is wherever you see HSBC – whether it’s in downtown Colombo in Sri Lanka or in its building on the creek in Dubai which is about as old as the city itself – you see a bank that is very much a part of the location, which brings with it very strong banking relationships. Another is that it has a reputation of avoiding silly risk, which is why it came through the global financial crisis in much better shape than most of its peers (the same can be said of Standard Chartered). Third, it has a long track record of paying steady dividends and being wise with its capital.

Now, one can argue that in an environment like this it is possible to be too exposed to emerging markets, and perhaps it is.But, in conclusion, here is Stuart Gulliver’s comment on the case for the emerging world: “We remain of the view that the GDP of mainland China will grow by 7.4 per cent this year, the UK by 2.6 per cent, the US by 2.5 per cent and Western Europe by 1.2 per cent. Although there has been a sharp sell-off in some emerging markets, we see this as a reflection of specific circumstances rather than a generalised threat. Overall, we remain optimistic about the long-term prospects of emerging markets and the opportunities for HSBC.”

Source: Forbes Business

 
 
 

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