Banking stocks are quietly rallying while technology companies grab the headlines, with market leaders like HSBC Holdings and Bank of China (Hong Kong) surging to multi-month highs in the opening days of trading in 2022.
Tighter monetary policy, underpinned by a surprise rate rise in the UK and signs of faster rate increases in the US, has brightened the outlook for earnings with margins forecast to expand. Generous dividends may be sustainable as governments put the pandemic under control.
HSBC, the most valuable lender globally which derives 53 per cent of its revenue from Asia, appreciated 6.8 per cent in the opening week of the new year, sending it to a 22-month high and steadying the Hang Seng Index. The momentum has also lifted Bank of China to a seven-month high, while Standard Chartered fetched the highest since mid-November.
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“Banks are among those low-valuation stocks and their values stand out amid expectations about [global] liquidity tightening,” said Wang Chen, a partner at Xufunds Investment in Shanghai. “They also look attractive in terms of the outlook of dividend payouts and yields.”
Wang has added some Hong Kong-listed banks through exchange-traded funds over the past few months, without naming any specific lenders.
The run-up suggests global funds are favouring old-economy bellwethers again to safeguard against tech-stock volatility. A slump in Chinese technology juggernauts abetted a 14 per cent drop in the Hang Seng Index in 2021, the worst performer among major global benchmarks.
HSBC, which froze dividends during the pandemic in 2020 to preserve cash, will boost its payouts through 2024 as margins improve, according to Katherine Lei, an analyst at JPMorgan Chase. It may deliver 24 Hong Kong cents per share for 2021, 25 cents in 2022 and 30 cents in 2023, according to her forecasts in a December 7 report.
HSBC closed 1.5 per cent higher at HK$52.75 on Wednesday, sustaining a six-week winning run. Lei has a price target of HK$58, an upside underpinned by a potential US$2 billion annual stock buy-back plan through 2024.
Faster interest-rate increases by the Federal Reserve is likely to add more gloss to banking stocks. Minutes from the Fed’s previous rate-setting meeting showed policymakers will probably raise borrowing costs by three times this year.
“The biggest takeaway is that the Fed has become more hawkish, meaning possibly faster rate hikes and liquidity tightening this year,” said David Chao, a global strategist at Invesco in Hong Kong. “This in turn has exerted downward pressure on high-valuation stocks, especially growth and tech stocks.”
To be sure, making the right selection is crucial. Banks may burden investors with delinquencies from their lending to troubled Chinese companies, especially among debt-stricken developers like China Evergrande Group and Kaisa Group.
Lending to the property industry accounted for 27 per cent of the outstanding loans advanced by Chinese banks at the end of September, according to Everbright Securities. The non-performing loan ratio at domestic lenders stood at 1.89 per cent as of November, almost unchanged from the start of 2021, according to the official data.
Money managers, however, can take some comfort from the valuation angle. One metric implies the rally in major banks in Hong Kong has more room to run. HSBC trades at a 24 per cent discount to book value, while the gap for Standard Chartered stands at 54 per cent, according to Bloomberg data. Their global peers trade at a 70 per cent premium.
For Mark Jolley, a global strategist at CCB International in Hong Kong, companies with higher leverage levels such as banks are good buys in 2022.
“A steady shift in interest rate and nominal growth expectations will cause a major rotation in market leadership,” he said. The trend will favour markets and sectors with high operating leverage that benefit from conditions of strong nominal economic growth, he added.
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