If you had to put all your investment money in just one company before the London stock market closed down for ten years, would that company be HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), the banking and financial services provider?
So, we are locked in the shares for 10 years and we don’t get to check the share price during that time at all. That’s a leap of faith and a demonstration of commitment to a firm’s business model that tests our confidence to breaking point.
If we can’t do that with HSBC, should we be investing in the company at all? When it comes to HSBC, or the rest of the financial sector, I couldn’t do that.
But HSBC is a play on emerging markets
HSBC is big in emerging markets with around 70% of 2013’s profit before tax coming from Hong Kong and the rest of the Asia Pacific region. Surely, then, the firm is well placed to profit and grow as these up-and-coming regions flower. After all, it’s a bank, and banks facilitate just about all the economic activity in a region whilst skimming off a nice profit.
Not so fast. Banking, and all the financial shenanigans in which banks entwine themselves, is fraught with complexity. Heck, even HSBC’s interim report took 28 RNS announcements to get out! Apart from the important consideration of whether it’s worth dedicating a chunk of our short lives to attempting to understand such feedback, the sheer density of operations maximises the potential for downside risk.
HSBC’s CEO reckons customer activity is muted and regulatory and governance requirements continue to rise increasing the firm’s costs. That’s now — imagine what trouble besets the firm when macro-economic conditions really tank. The big problem for the financial sector is its close attachment to general macro-economic cycles. Banks are cyclical to the very core, and that’s what makes them dodgy buy-and-forget investments.
What now?
For the sake of our thought experiment, buying HSBC Holdings’ shares ten years ago means we’d have picked them up for around 775p each. Today, they stand at about 628p. I know there have been a few dividends along the way, but that’s a poor result for a 10-year investment.
Given the cyclicality of the sector, I have no confidence that the next 10 years will work out differently for HSBC Holdings’ investors, so I’m keeping away.
To me, banks are for trading and don’t make good long-term investments.
