As a pessimistic optimist, I know that markets are never “Heads You Win, Tails I Lose”. There does seem to be a consensus developing that it’s all getting a bit bubblicious. However, you still have to bat clever to make decent returns. And that means thinking outside the box to pick winners and losers – and I’d like to present some ideas on how investment imperatives have to adapt as the underlying narrative changes.
But first.. a brief digression into the nature of time, the universe and everything…Some time ago I read a prediction 40% of the current top 500 global firms will have fallen out that top tier or disappeared completely within the next 9-years – overtaken by changing markets, obsolescence or simple Darwinian corporate evolution. That’s an incredibly fast market rollover rate. It’s set to accelerate as new technologies and new opportunities open up whole new vistas and ways of doing business.
Predicting the future is never easy – especially when money is a stake. But that’s what investment managers get paid for. Corporate assets – which are dominated by two fundamental asset themes – face two fundamental questions:
- Equities – Which are the stocks that are going to generate expanding and consistent returns into the future?
- Credit – Which are the companies which are going to repay their debt?
Speak to any good corporate debt investment manager and they will explain they are shortening duration, and sticking to short maturity corporate debt because; a) they believe inflation is a rising medium/long-term threat, b) bond yields are artificially low and will rise (causing a collapse in corporate bond prices), and c) the longer firms exist in an artificially low interest rate environment, the less chance they will survive when rates rise. There is a growing legion of undead debt zombies – companies that simply will be unable to service their current debt if and when interest rates rise.
Any good equity investor will tell you they are focused on fundamentals and the future. They understand how the economy will emerge from the current pandemic hiatus by buying the stocks that will re-emerge and provide decent returns. The Future means understanding which of the multiple new technologies from meatless meat, bankless banking, 3D everything, any form of intelligence, big/small/medium data, etc are changing the world, how they are inter-reacting, and how that are likely to spawn the next Apple, Amazon, Tesla or whatever emerges from the gloop of new ideas.
Perversely, while the future is all about getting on board the next New New Thing, the reality is most new things fail and even the successful tech companies still take years to get going. Experience shows it often better to wait and see what emerges from the frothy, hyped competition in the start-up arena. In today’s speculative markets everyone assumes any idea is good one and immediately worth $2 billion. The reality is they often aren’t. There is a skill to picking winners.
The reality is the world is changing, and as it changes, the underlying narrative changes. Accepting change is also a skill. Accepting that it is not all about US Tech stocks is just clever.
Let me illustrate:
I have little time for HSBC – if I was looking for a bank doing banking badly, HSBC ticked every box. Yet, it’s a great illustration of how investment narratives change as the information and ecosystem changes.
Ten years ago, HSBC was my top global banking stock – it survived the Global Financial Crisis in one piece, had apparent global survivability and strength written all across it, and looked set to champion east-west commerce. It was dull, boring and predictable with a clear consistent path to remaining profitable and expanding core financial institution.
Over the next few years it’s narrative stalled and deteriorated.
Its claim to be the World’s local bank was quietly ditched. In the wake of avoidable financial scandals caused by a lack of oversight, it was managed to appease regulators rather than customers. It’s retail banking became a lame-duck joke. It squandered financial leadership. It blustered and threatened a move back to Hong Kong, just before China decided to take back the city. Its incestuously conceived leadership stumbled from crisis to crisis. It proved utterly unable to overcome its bloated internal bureaucracy. Over the course of 10-years, the World shifted and the foundations of the bank wobbled because it didn’t move apace. When it finally got around to appointing an outsider chairman, the stock tumbled on a series of botched appointments. The stock’s collapse illustrates how the market lost faith.
If past performance is anything to go buy, then HSBC would almost certainly be one of the 80 stocks likely to disappear in coming years…
But, maybe not. I’m back on board. HSBC is back on my buy list.
On Tuesday, it announced 2020 profits are down 34%, but the stock initially jumped on the news. Why? The bank is now getting serious about pivoting to Asia – the source of the bulk of its income. It sounds like it’s going to give up the pretence of being a leader in Western retail banking. Shareholder pleasing stock buybacks are on offer. I suspect it’s only a matter of time before CFO Ewan Stevenson, (who gets increased responsibilities from “transformation” and M&A) with his experience of the outside world (from Royal Bank of Scotland – a lesson in how not to do it), is promoted to CEO to speed the change.
Moving to Asia is fraught with risk – the recent experience of Alibaba where ill-chosen words and the wrong political friends cost Jack Ma his shot at being the world’s richest man is a great example of the potential political risks overcoming the market. HSBC is making the decision that the risks of transition as less than becoming an irrelevance in the West. And that’s a good call.
No one would bat an eyelid if HSBC had been a Singapore bank that has made lucky with a global brand. Because it’s a Hong Kong bank now overshadowed by a perceived China challenge – it looks like it’s going to embrace the opportunity. While Hong Kong clearly faces challenge – it’s also highly unlikely the Chinese would give the West a victory by allowing it to crash. By kowtowing to the emperor, HSBC might just make itself investible again.
All that said, I am still exiting and closing all my HSBC accounts in the UK – because its UK offer is unlikely to get any better.
For western investors – Asia is a challenge, but stocks are cheap and growth is higher.