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HSBC shares vulnerable to US-China trade war, says RBC as it downgrades the stock

RBC downgraded HSBC to an ‘underperform’ rating from ‘sector perform’ and lowered its target price to 730p from 560p.
HSBC's direct exposure to China is 11% of profits

HSBC Holdings PLC (LON:HSBA) shares are vulnerable to the impact of an expected slowdown in China’s economy resulting from a trade dispute with the US, RBC Capital Markets said.

The US has imposed tariffs on US$250bn of Chinese imports this year and has threatened to increase the levy next year. The measures are likely to impact Chinese exports, which is expected to provide a drag on the nation’s gross domestic product (GDP).  

“HSBC's share price has historically been 72% correlated to the GDP growth of the countries in which it operates, it is therefore vulnerable to a fall in GDP in one of its significant geographies,” RBC said.

It added: “HSBC's direct exposure to China is 11% of profits however this increases to 59% if we include indirect exposure from Hong Kong and Singapore whose own economies are strongly correlated to Chinese growth (77% and 86% respectively).”

RBC cut its recommendation on the stock to ‘underperform’ from ‘sector perform’ and lowered its target price to 730p from 560p.

READ: HSBC's first-half profits beat expectations as investment strategy pays off

The broker said its estimates for pre-tax profit in 2020 are 5% below consensus forecasts. HSBC has guided to a return on tangible equity of more than 11% but RBC predicts 10.5%.

“We are more negative than consensus on CAGR (compound annual growth rate) revenue growth (RBC estimate 5.1%; consensus forecast 5.9%) driven by our expectation of a slowdown in China and the potential for a knock on effect in HK and Singapore from a dampening of loan growth and lower wealth management revenues.”

In morning trading, shares edged down 0.12% to 606p. 

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