After the early years of the financial crisis — during which their bank seemed immune from the carnage that inflicted its London-listed peers — investors in Standard Chartered (LSE: STAN) have had a rougher time of it recently.
Indeed the share price is down 25% since peaking at over £19 in November 2010. In comparison the FTSE 100 has advanced around 20% over the same time.
One reason for Standard Chartered’s weak performance has simply been its financial results.
The company has seen a decade run of double-digit profit growth come to an end. Bad debts in South Korea have hit the balance sheet and a slowdown in emerging market trade has prompted the bank to focus more in the future on sustainable profit growth than its hitherto rush for higher revenues.
Yet the bank’s shares have also been hit by its close association with China, and on-off fears that its breakneck economic expansion will end with a bang.
China crisis
China’s economy is slowing, there’s no doubt about that. As recently as 2010 its GDP was increasing at a rate of more than 10% a year. It posted at annual rise of 12% in 2009, even as the rest of the world was reeling from the financial crisis.
GDP growth has steadily ticked lower since then, however. In the first quarter of 2014 the economy grew by just 7.4% — the weakest rate for 18 months.
China’s government is still forecasting growth of 7.5% for the year, although it seems to think a slightly lower rate would be acceptable. But some external commentators think the economy will do well to manage 7% and that it could even slow to as low as 5% GDP growth over the next two to three years. We’d kill for that in the West but it would mean major economic and even social unrest for China.
As for Standard Chartered, it’s exposed to China’s fortunes because its largest single market is Hong Kong. The territory accounted for 28% of its profits before tax last year.
While Hong Kong is to some extent a region apart from China (particularly when it comes to governance) it’s fair to say the Hong Kong economy is dependent and entwined with the fortunes of the mainland.
Hence any hard landing in China is likely to hit Standard Chartered directly via its operations in Hong Kong – as well as through the knock-on effects that would be felt throughout the rest of the Asian region.
Perking up property
One thing that might improve confidence that China will hit its growth forecasts — and hence take some of the pressure off Standard Chartered’s share price — could be relief for the Chinese property market.
For instance Chinese real-estate companies jumped 2-5% in a day recently on mere speculation that the government might ease widespread restrictions on purchasing property, in order to hit those GDP growth targets I mentioned.
Whether or not this would be a sound long-term move is another question – there was a reason the government introduced the curbs in the first place, and some China bears argue that the bursting of what they see as an inflated property bubble would be at the heart of any correction in the country.
But four years after the property curbs were first introduced, sliding home sales and declining production continue still weigh on the Chinese economy.
Investment bank UBS has estimated the real estate industry accounts for more than a quarter of final demand in the Chinese economy, due to its knock-on demand for goods, materials, and services.
Any lifting of restrictions on property could therefore mean a short-term boost for growth, and hence be good for Standard Chartered.
Don’t fear the debt
For its part, Standard Chartered doesn’t seem to see signs of a debt bubble in Asia. In its most recent annual report the bank stated:
“Concern over Asia’s debt levels appears exaggerated. It does provide a timely opportunity for cleaning up stressed balance sheets in parts of the region, but it also sets the stage for the next phase of more durable and sustainable growth.”
And analysts at the research firm MorningStar agree that the threat to Standard Chartered of a Chinese property bubble is over-emphasised. Touting the bank’s shares as a Buy earlier this year, they wrote:
“[…] Standard Chartered’s prudent lending will help to limit loan losses if these bubbles burst. Experience has shown that as real estate bubbles collapse, commercial real estate assets take the fastest and the largest losses; institutional property owners are more willing to walk away from existing underwater properties than are retail property owners, and projects under development are quickly abandoned as demand dries up.
We’re reassured to see, therefore, that Standard Chartered’s exposure to commercial real estate and construction in Hong Kong and Singapore is limited to 2.4% of total loans and 16% of equity.”
Cheap shares, but do your own research
Do you agree that Standard Chartered could benefit from greater-than-expected growth in China, without being too exposed to any downside if things overheat again?
If so the shares might just be a great investment. At £13.38 they’re on a P/E below 11, and that ratio is forecast to fall below 10 in 2015. There’s also a tempting 4% dividend yield on offer.
