Last week HSBC announced that it is re-assessing the location of its headquarters “as part of a broader strategic review.” Perhaps conveniently, the phrasing is vague enough to leave some room for speculation; does the bank really want to relocate or is it merely a tactic for negotiating on taxes with the UK government? Would relocation put the H back in HSBC? If so, what is the expected timeframe? If anything, is this a positive for shareholders?
The uncertainty and speculation also poses more down-to-earth and practical challenges for the investment community; if country restrictions are part of your investment mandate the move might actually mean you will or will no longer be allowed to invest in HSBC. Even those taking a passive approach could be affected, as the relocation might affect future index membership.
From an analytics standpoint, being able to determine your own classification of a company can have significant impacts on your attribution results. Depending on the classification, a substantial overweight in HSBC will either show up as an overweight in UK or an overweight in Hong Kong. Consequently this will not only influence the country allocation effect as we are overweighting a different country, but also the selection effect will be different as we’re comparing HSBC’s performance to a different country’s return.
But is that all? Are we safe assuming a company to be just a product of its country of domicile? In other words, should HSBC be discretely either UK or Hong Kong? If we want to take a more comprehensive view, FactSet’s GeoRev data paints a more nuanced picture.
The answer isn’t so straightforward. The UK and Hong Kong contribute nearly the same towards revenues, and although they are the two biggest exposures, between the two they still represent less than 50% of revenues. Yet GeoRev data does give us some meaningful insights into the company, as well as a tool to tilt a portfolio to or away from markets outside of what would be formalised in the mandate. For example, if one wanted to get exposure to the Americas while staying in what we would traditionally call UK banking, Barclays could be just the stock to do that.
Within and beyond borders
In today’s globalized and interconnected world, investors can no longer think of a company as a pure domestic play. Although this might require some rethinking about how we define and report countries and exposures, it also presents us, especially with data such as GeoRev readily available, with an opportunity to stay within and go beyond borders at the same time.
I’m not advocating what is the right way to classify HSBC and how this will change with the potential relocation, but with the stock price soaring more than 7% on the relocation news, one thing is safe to conclude: country of domicile does matter.