Directors at HSBC (LSE: HSBA) (NYSE: HSBC.US) stirred up a hornets nest by unveiling a review of its headquarters’ location, with Hong Kong seen as the most likely alternative destination. The Hong Kong Monetary Authority made receptive noises, and HSBC’s shares rose over 3% as the move was welcomed by Asian investors. According to some rumours HSBC’s UK bank might be spun off to assist the relocation, which would cut taxes and heavy regulatory costs.
I doubt this review will herald any change. The US regulatory authorities will make it difficult. The UK will hardly play ball. China is too untested to host a global bank, and the markets would punish HSBC’s debt ratings if lacked a gold-plated regulator and lender of last resort.
Follow the money
But it is part of a pivot in HSBC’s mindset, with a management once desperate to escape Hong Kong now looking longingly back in its direction. If not this review or the next, HSBC will one day move back to its original home. It will inevitably follow where the critical mass of its business lies, and be one more manifestation of the shift of global wealth eastwards.
Within the next 15 years two-thirds of the world’s middle classes will live in Asia Pacific, according to the Brookings Institute. Meanwhile the US and Europe’s combined share will shrink from 54% in 2009 to 21% by 2030.
It’s not just a matter of where the majority of retail customers and wealth-creators live. Asia Pacific is home to the largest creditor nations — a fact underlined by the establishment of the Chinese-sponsored Asian Infrastructure Investment Bank, which prompted former US Treasury Secretary Lawrence Summers to say that this month may be remembered as the moment the US lost its role as the underwriter of the global economic system.
Three-quarters of capital markets executives polled by PwC think Asia Pacific will have a global financial hub to rival New York and London within five years. And Chinese investment into Africa and Latin America points to the future trade flows that HSBC will want to capture.
These tectonic shifts on global wealth and power have massive implications for investors.
It’s not an easy theme to play directly. “Invest in China” is a risky proposition, bearing in mind the history of certain Chinese companies on AIM, the speculative bubble in the Hong Kong stock market, and the potential for a hard-landing for the Chinese economy.
How to profit
The safest way to play this trend is through global firms that are investing to build market position in the region. Even they can have setbacks. GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Diageo (LSE: DGE) are prime examples. GSK found its sales force implicated in the endemic corruption in the Chinese economy, whilst ironically Diageo’s sales of premium drinks took a knock in the wake of president Xi Jinping’s anti-corruption drive.
It would be a mistake to fret over these short-term negatives. The real story is that GSK and Diageo are entrenching themselves in the major global markets of the future. Being relatively early-movers will serve them well in long run. Investors who want to gain from the rise of Asian wealth would do well to follow such companies.