The global financial sector looks increasingly bullish, and whether you invest in the US or Europe there are some great plays setting up.
Weekly Investment Idea
The Select Sector SPDR Trust, for the financial sector, has an ETF with ticker XLF. Since the dip caused by coronavirus completed in March 2020, the trajectory for this fund has again been higher with a slight pause these last few months as we waited for the latest round of earnings from the major banks. Investors in the banking industry have been rewarded and banks are making profits and beating market analysts’ expectations once again. XLF at the time of writing looks to be on the cusp of a breakout trade to the upside and to go for all-time highs once again. The XLF is 100% US banking focused with Banking Services, Investment Banking, Insurance, and Professional & Commercial Services.
XLF’s top holdings are Berkshire Hathaway Inc., JPMorgan Chase and Co., Bank of America Corp., Wells Fargo & Company, Morgan Stanley, Citigroup Inc, Goldman Sachs Group, Inc., BlackRock, Inc., American Express Company, and Charles Schwab Corporation. The 10 household names topped by Warren Buffets Berkshire Hathaway make up 54.30% of the fund.
Nearer to home one of the globe's largest banks is HSBC. Formerly known by the title The Hongkong and Shanghai Banking Corporation, HSBC Holdings Plc is a British multinational investment bank, set up to facilitate transactions and trade between Europe and China. It is currently one of Europe’s biggest banks and following on from the Bank of England relaxing its guidance to banks in preparation for the worst during the coronavirus pandemic. The Bank of England ordered the UK’s largest banks not to pay cash bonuses to senior staff and to suspend dividend payments last year to preserve capital and ensure lenders could support the British economy in case of a big economic downturn. This week HSBC said it would restart its interim dividend following on from an earlier announcement that it had made £7.8bn in profits this last 12 months. The bank now expects to hit its target dividend pay-out range of between 40% and 55% of earnings by the end of this year. It has also increased its bonus pool for its bankers. Its top bankers will have another six months to increase the bonus pool before it is paid out next spring. Sums can reach €5m up to €10m for the top bankers, with the majority of top earners receiving a 7-figure bonus.
HSBC is dual-listed on the UK FTSE 100 and the Hang Seng index and back in October 2020 and today’s price action in the FTSE is looking very positive. Of all the major indices that we follow the FSTE 100 has so far failed to make new all-time highs, but a breakout above the 7200 would be a great indication that 8000 was still on the cards.
Long-term investors in HSBC have not had the best of times since the GFC years and in reality, looking at the monthly chart the share price has been trading in a relatively small range set back in the run-up to the millennium. The coronavirus basically pulled the share price for HSBC back to the lows of the 2008 GFC rout but buyers were there ready to step in when the Fed and central banks all came together to support the global economy. For me, I am confident that 270.00 is a decent floor in the share price. The Brexit lows of 2016 were tested by the share price again in 2021 and the 410-460 range proved to be resistant.
For traders looking for a long term buy this pullback that started in June has found support from the price action levels that traded in December 2020 and I would be keen to bet that the 376.15 lows are unlikely to get tested and therefore they would be a great place to place a stop loss and mitigate the risk, should the 400 level get taken on the back of new investor optimism.
On a daily chart, HSBC is currently in a descending channel, which has a high probability of breaking to the upside. There is quite a lot of resistance above and the Ichimoku cloud represents that well, so for traders who don’t want to take a punt at these levels, waiting for a break above the indicators cloud could be a great way to play along. For the bulls, the stochastic indicator is currently showing a positive divergence to price, with the oscillator making higher swing lows, even though price action has been making lower lows. This to me indicates that the momentum to the downside is slowing and if that is the case at some point the bulls will take control.
On the intraday hourly chart, the descending channel is easier to read, and again the Ichimoku cloud is doing a good job of indicating when possible, breakouts to the upside could be occurring.
HSBC is currently being led by Noel Quinn who was appointed Group Chief Executive in March 2020, which coincides with the most recent share price lows. Mr. Quinn said "We were profitable in every region in the first half of the year, supported by the release of expected credit loss provisions. Our lending pipeline began to translate into business growth in the second quarter and we further strengthened that pipeline during the half. This performance enables us to pay an interim dividend for the first six months of 2021." And that "These are good results that reflect the return of growth in our main markets and marked progress in the execution of our strategy,"
The strategy includes targets for accelerating the shift in business towards Asia and wealth management as these areas have demonstrated the highest returns. There is a worry that HSBC will focus even more on China and that the Chinese authorities could derail the profits for HSBC with their new regulations and policies, especially towards Hong Kong. HSBC strives to be the global leader in cross-border banking flows, leading the world in serving mid-market corporates globally. They’re focusing on becoming a market leader in Wealth Management, especially across Asia. They currently facilitate $760bn of trade annually for their customers.
In today’s statement, Noell Quinn said "We were profitable in every region in the first half of the year, supported by the release of expected credit loss provisions. Our lending pipeline began to translate into business growth in the second quarter and we further strengthened that pipeline during the half. This performance enables us to pay an interim dividend for the first six months of 2021."
This amount of bullishness within the business should propel the share price higher fundamentally and technically, we’re in a great area for accumulation.