Donald Trump’s election as President of the United States shocked the world, but now the dust has settled it’s time to sit down and work out what the billionaire’s ascension to the White House will really mean.
For investors, this task is a difficult one. Some companies will be affected more than others by Trump’s proposed policies if they go ahead.
Who will feel the most pain?
China is just one of Trump’s targets. When campaigning, he proclaimed that if elected he would place huge import tariffs on Chinese manufactured goods and labelled the country a currency manipulator.
The ultimate goals of such policies are to help inject life into the US manufacturing sector by withdrawing cheap Chinese goods from the market. And it’s likely that these actions will hurt China more than they do the US.
Indeed, a large chunk of China’s economy is built around the export business, and the US is one of the country’s most significant export markets. A sudden drop in sales to the US could severely impact China’s already fragile economy, and with debt nearing 300% of GDP, China has little room for manoeuvre.
Likely to suffer
Unfortunately, all of the above means that HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) will likely suffer from Trump’s presidency. These two banks are highly exposed to Asian economies. HSBC, in particular, generated $11bn of its total $16.7bn in adjusted profit for the first nine months of 2016 within Asia. Year-on-year reported profit before tax in Asia fell by $2bn.
Meanwhile, Standard generates essentially all of its income in Asia and other emerging markets. The company has been struggling in recent years as loan impairments have risen thanks to falling commodity prices, which have put producers under strain. This trend shows no sign of abating any time soon. For the first half of the year, the company reported $1.1bn in underlying loan impairments, down substantially from last year’s figure but management has cautioned that “stresses remain” in the loan portfolio and the group’s bankers continue “to be watchful”.
Time for caution
Standard is right to be cautious about what the future holds for the Asian lending market. According to credit rating agency Fitch, there are approximately $1.1trn to $2.2trn of bad loans in China’s financial system, equivalent to around 20% of the country’s economy at the high end.
Even if a small percentage of these loans defaulted, it would send shockwaves across Asia. While it’s not possible to know exactly what is on HSBC and Standard’s balance sheet, we can be sure that a sudden rise in Chinese loan impairments would shock these banks to the core.
Analysts at JP Morgan estimate that HSBC could be on the hook for $15.3bn this year alone as loans are written off. At the end of 2015 HSBC had $273bn of direct lending exposure to greater China with around $150bn of loans on property.
So overall, a Trump presidency could be terrible for HSBC and Standard if the Republican succeeds in bringing in his protectionist policies.