London-listed bank stocks enjoyed a good run up between last autumn and February. But sentiment has moved against them now and they are dropping.
For example, at around 573p, the HSBC Holdings (LSE: HSBA) share price is around 12% down from last month’s peak.
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But to put that into perspective, it’s still about 17% higher than a year ago. So the situation isn’t a disaster for shareholders.
But will this downtrend continue? And if it does, will HSBC become a compelling value proposition for investors to snap up?
Weak stock markets
In an attempt to figure out what’s going on, I’d look at the bigger picture. And the first thing is that most of the market is suffering from a ‘correction’. And these downwards moves are a fact of investing life.
Meanwhile, it seems the current bout of weakness kicked off because of the Federal Reserve in the US. Policymakers there have been making hawkish sounds about fighting inflation.
In other words, it looks like the Fed is preparing to hike interest rates even more. But the timing of any further uplift remains unclear.
The big fear affecting investor sentiment may be the possibility of higher interest rates causing economic contraction. Perhaps America will plunge into a recession. And where the US markets go, the UK’s often follow.
Therefore, a slowdown in general economic activity may lead to lower company profits. And a scenario like that would be unsupportive of share prices.
If those fears play out, lower share prices make sense now. But the banks are in a unique situation. They tend to rely on the economic activity of individuals and businesses to thrive.
If businesses and individuals do well, the banks do well and vice versa. But bank stocks are known for their predictive tendencies. So they’re often among the first to plunge if there’s the slightest whiff of an economic slowdown in the air.
Why I’d watch HSBC right now
And that may be happening now. However, banks can be the first shares to shoot higher when the scent of economic recovery fills the air. Therefore, it can be a good idea to look at bank stocks such as HSBC Holdings just after they’ve cycled lower.
Meanwhile, this month’s collapse of Silicon Valley Bank (SVB) has been another factor spooking investors. Indeed, it’s hard to avoid thinking back to the way banks toppled in the financial crisis of the noughties
SVB was a commercial bank headquartered in California. And it was the 16th-largest bank in the US at the time of its failure on 10 March. The operation was a subsidiary of the bank holding company SVB Financial Group.
But today, HSBC announced it has acquired the UK ring-fenced subsidiary of the operation, Silicon Valley Bank UK Limited. The move cost HSBC £1. And the assets and liabilities of the parent companies of SVB UK are excluded from the transaction.
There are no guarantees this deal will prove to be value-enhancing for HSBC shareholders. But chief executive Noel Quinn said the move makes excellent strategic sense.
Overall, I think HSBC is well worth digging into with deeper research now.
