The FTSE 100 is sliding further today, past Brexit lows into unchartered territory. This is a scary time for shareholders and with the British government pledging £30bn to assist the UK’s economy during the coronavirus outbreak, the spotlight is on banks.
The global economy has never been so highly indebted, neither have businesses nor individuals, and this chain of debt increases uncertainty and panic.
During his yearly interview to discuss Berkshire Hathaway’s annual report, billionaire investor Warren Buffett reminded shareholders not to panic. He reiterated that being greedy when others are fearful is a great way to cement long-term wealth generation.
I think panic is an emotional response that doesn’t serve anyone well. A key principle of investing is to never let emotion guide your investing decisions. We’d all do well to heed Buffett’s advice.
Asian market exposure
Investment banking company HSBC Holdings (LSE:HSBA) operates across 65 countries and has a large Asian presence.
Like so many global banks, HSBC is highly geared and has been on a cost-cutting path for some time. Last month the bank confirmed 27 branches will be closed in the UK and 35,000 jobs will be cut worldwide.
Its annual report stated profits fell almost 33% to £10.2bn, in response to the economic climate and major restructuring costs. Two areas presenting insufficient returns are the US and Europe. So, it plans reduced investment banking exposure in these areas. City analysts recently downgraded the FTSE 100 bank as its streamlining costs escalate.
Sky-high remuneration for bankers has been a bone of contention since the 2008 financial crisis. Almost 420 HSBC executives in Europe received million-euro pay packets in 2019. With thousands facing job losses, I don’t think this disclosure will go down well.
In recent years, HSBC has increased its exposure to rapidly developing economies, positioning itself to assist Asian companies with their global trade. Time will tell if this is a blessing or a curse, as the extent of the virus disruption in these areas becomes apparent.
Long-term investment
With a long-term view to owning shares in businesses, I don’t think HSBC will go bust. Once China gets back to business-as-usual, it will want to forge ahead with global trading. HSBC is well placed to facilitate this.
However, I don’t think it’ll be plain sailing or a quick fix. The centre of HSBC’s Asian business takes place in Hong Kong, which is also experiencing extreme levels of political unrest. Investing in HSBC is very much a long-term play, at a slow pace with many hurdles along the way.
A pandemic creates unprecedented uncertainty, but I don’t think it’s ever a good idea to sell stocks while the financial markets are in freefall. This is because the volatility is caused by institutional investors, rather than individual investors. In a day or two, the FTSE 100 should rise again, so it’s always better to ride out the storm and make your decisions to buy, sell, or hold once calm is restored.
I don’t think HSBC is a good buy just now, but equally, if you’re a shareholder in HSBC, I don’t think you should sell. Its 8% dividend yield should lessen the blow, and when the market recovers, you’ll be glad you did.
