7 June 2015

HSBC continues to plod higher. As banking stocks go, it’s not particularly exciting, but HSBC and Asia-focused peer Standard Chartered have experienced somewhat of a  reversal of fortunes recently. No longer are they out of favour on account of their over-exposure to things not western. Quite the contrary – it seems that right now anything not western is where investors want to be. When emerging markets become the less volatile option, that’s food for thought!

The outlook for US monetary policy is now seeing a rate hike not in June or July and only maybe in September, as long as the Brexit ripples have calmed by then. So it’s been funny to hear JP Morgan’s Jamie Dimon threatening to sack a bunch of the bank’s UK staff in the event of a Brexit. Sure, he’s got good reason to be worried – JP Morgan is a US bank. All banks have been hurt by low interest rates and with those in the US unlikely to be going up meaningfully any time soon, perhaps not even this year, the light at the end of the tunnel has shrunk once more to something more akin to a pin prick.

Of course there’s a host of other drivers in play like regulatory stuff (especially harsh in the US) and just general sentiment towards the harbingers of the financial crisis, but interest rates are certainly the factor of, well, interest currently. Namely UK interest rates. Since financials benefit from higher interest rates, it follows that UK banks might actually stand to benefit if the UK votes to leave the European Union on 23 June. That’s because, if Sterling does indeed make the apocalyptic move south that everyone’s predicting, the Bank of England may be forced to raise interest rates in order to bolster the currency.

For banks that are UK headquartered (like HSBC and Standard Chartered) that’s good, and it’s potentially even better if they’re UK headquartered and underweight in terms of exposure to the UK economy. Oh, like HSBC and Standard Chartered? Furthermore, if you think no one will be interested in UK Gilts because the UK will be the new North Korea, then you’re just wrong. Don’t just  look at the competition in the form of non-yielding Gold, ultra-low yielding US Treasuries and the negative yields in Europe and Japan, realise also that quite simply the world will not end in the event of Brexit.

2016 falling highs currently present and obstacle for HSBC shares, which have recovered 8% since early April. Those in Standard Chartered have rallied 46% from their February historic lows and  are within spitting distance of their 200-day moving average. Both are either at or near significant short term technical levels.

HSBC (HSBA) 

Broker consensus: 29% Buy, 45% Hold, 26% Sell. 17 out of 25 brokers are currently bullish on the stock while the average 12-month target price of 487.5p is indicative of 7% upside (Source: Bloomberg, 7 June)

Standard Chartered (STAN)

Broker consensus: 26% Buy, 44% Hold, 30% Sell. 12 out of 21 brokers are currently bullish on the STAN with the most bullish seeing 44% upside from current levels. However, the average 12-month target price of 487.5p is indicative of 7% downside – this likely on account of STAN’s high Price to Earnings ratio relative to its sector average. (Source: Bloomberg, 7 June)

Augustin Eden, Research Analyst