Tag Archives: Banks

article 3 months old

Austbrokers Pleases With Another Upgrade

-First half results please
-Acquisitions still feature
-Sound growth record to continue


By Eva Brocklehurst

Austbrokers ((AUB)) pleased on many fronts with its half year results. The insurance broking business showed the benefits of acquisitions and a favourable premium rate environment. Full year guidance was upgraded for the third year in a row, income was strong and operating margins were stable.

Austbrokers expects 10-15% profit growth in FY13. Accordingly, there was a rush from analysts to revise up earnings forecasts. Macquarie expects the rest of FY13 to show the same positive trends. Organic volume growth should come from increased customer take-up of commercial insurance, while premium growth will be driven by increases in underwriting agencies as well as contributions from recent acquisitions. Offsets? A slight reduction in interest income from low interest rates. Credit Suisse expects similar drivers of growth but does not believe Austbrokers will benefit from a hardening of premium Small-Medium Enterprise (SME) rates in the near term. BA-Merrill Lynch is of the same opinion, noting the SME sector economics affects the activity level for the likes of Austbrokers. BA-ML finds the current economic environment weak, albeit improving.

Credit Suisse is confident of further upside to earnings in the medium term, given the company's ability to win new market share as well as increasing the diversity of income. Life insurance income increased 25% on the prior corresponding half, largely from the July 2012 acquisition of Taggart & Associates and the January 2012 acquisition of Gladstone. BA-ML flags rising premium rates in the Australian general insurance market, particularly in property classes. This segment comprises over 40% of Austbrokers business and should translate into strong commission growth.

For UBS, the consolidation in the industry will continue and this means more acquisitions are on the cards. Austbrokers made six business/portfolio acquisitions in the half, including BGA Insurance Brokers in December, and spent $15.5 million. Nevertheless, BA-ML sounds a note of caution through all the upbeat prognostications. It is difficult to judge the merits of the acquisitions other than on earnings appreciation, although this has been solid.

With much upside priced in Credit Suisse prefers to retain a Hold rating. On the FNArena database this is the only one. The three others covering the stock have Buy ratings. UBS is one of those and highlights a good result for commission and fee income. Moreover, this organic growth should continue as the bulk of renewals comes in the second half. For UBS the stock is not cheap but the strong returns underpin the Buy rating. BA-ML liked it all, noting the business has a stable history of delivering. The broker also finds Austbrokers is a direct play on the insurance cycle, perhaps better than the insurers themselves. This way you get to avoid claims risks. Macquarie has the third Buy rating. Industry dynamics present a strong upside risk to the broker's forecasts, regardless of the macro economic environment. The database consensus is $9.64, revealing 5.9% upside to yesterday's closing share price.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

All Hail As McMillan Shakespeare Delivers

-Brokers raise earnings estimates
-New JV in the UK
-Solid leasing outlook
-More organic growth to come


By Eva Brocklehurst

McMillan Shakespeare ((MMS)), which provides workplace benefits administration services, has pleased brokers with its strong first half. In conjunction with the results, the company announced plans to enter the UK market in a joint venture with Visper, a UK-based asset finance company. Visper has had dealings with GMAC, the former owner of MMS' Interleasing business.

MMS has committed 1.5m pounds over five years to the JV, called Maxxia UK, and will appoint the managing director of the business. Citi is a bit surprised at this decision given there is organic growth opportunities domestically and it will take 2-3 years to scale up this business. What gives the broker comfort is that it requires little capital outlay and labour commitment. Credit Suisse thinks the JV is low risk and offers upside. Goldman Sachs suspects it may be a beachhead to further acquisitions in the UK. The JV will focus exclusively on distribution/brokerage of salary packaging and leasing products. BA-ML has put the news in the future drawer, noting it will be immaterial to earnings for some time.

On the FNArena database MMS draws two Buy ratings and one Hold. BA-ML and Citi have the Buy ratings and both have raised earnings forecasts for the company in the wake of the result. BA-ML said the result demanded an upgrade and has increased estimates by 5% for FY13 and 9% for FY14. Citi has increased earnings forecasts by 2% for FY14 and 4% for FY15. Goldman Sachs, while not a database constituent, has retained a Buy rating given the strong organic growth outlook.

The Hold rating comes from Credit Suisse, which has downgraded from a Buy on a valuation basis. The broker is attracted to the growth profile but finds the recent share price appreciation necessitates the move down. The database consensus target price of $15.85 suggests 10.4% upside to yesterday's closing share price. Indeed, Citi raised the price target to $16.56, despite solid returns over the last 12 months. This decision reflects a proven business track record and growth in the lease book, the broker maintains.

BA-ML believes the recent acquisition of fleet lessor, Interleasing, will allow the company to increase outsourced services to the private sector although the broker recognises competition is increasing. Credit Suisse has brushed this concern aside, noting operating drivers remain positive, especially in novated leasing, and these are supportive of further margin expansion. Citi concurs, noting the supportive industry structure and focused sales effort. The results were driven by strong operational performance from remuneration services and margin expansion occurred despite lower interest revenue. Then there's asset finance. Here the 27% growth in the lease book to $282m should underpin growth from that division in FY14 and beyond, according to Citi.

Goldman Sachs expects organic growth to come from further penetration of the South Australian Government employee base, now that MMS is the sole provider, and ramp-up of new corporate customers in asset management. The broker also finds further possible upside if any NSW health districts outsource salary packaging. MMS has flagged this as a significant possibility over the next 2-3 years. More potential is seen in the NSW government salary packaging contract which is up for tender. Goldman Sachs expects the incumbents, which includes MMS, will be retained.

Are there any negatives/risks? Well, the FBT salary packaging concessions are under review with a report due for the federal government in March. Goldman notes some risk for caps to be put on the value of venue hire and meal/entertainment but major changes are considered low probability. Although, if they do occur they will have a high impact. A significant fall in used car prices might affect leasing. Goldman notes profits from the resale of used vehicles were down compared with the prior corresponding half as the number of vehicles coming off lease fell. Finally, there's new ground being broken in the UK and that changes the company's risk profile, a bit.

See also, Headwinds Don't Change Macmillan Shakespeare's Solid Outlook on September 13 2012.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Bank Rally Looking For A Peak

Bottom Line 13/02/13

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up

Technical Discussion

Any way you slice it the banks are rampaging higher as institutional investors chase yields. The lowering of interest rates by the US Federal Reserve over the last few years has enabled US markets rip higher to almost new all-time highs as investors move from cash into more risky assets. Australia on the other hand has been lagging considerably for a number of reasons, one of which has been its higher interest rates. With the recent rate cut domestically and ongoing rhetoric about a little more to come we're finally seeing equities play some catch up, although in broader terms the biggest upside gains have been restricted to a handful of safe dividend payers such as Telstra ((TLS)), Woolworths ((WOW)), Wesfarmers ((WES)) and of course the big banks led by Commonwealth ((CBA)).

Tonight's chart is a little different. It shows the big four banks gains in percentage terms from the major lows of March 2009. This is a percentage change chart and excludes dividends. Like the broader market the banking index is really a tale of 2-speeds, CBA and ANZ ((ANZ)) strongly leading,  with National ((NAB)) and Westpac ((WBC)) bringing up the rear. Media will have you believe the ASX was a strong performer last year but if you strip out the top 100 stocks, namely because they are the higher yielders, you also get two very different stories. The ASX-100 Accumulation index has increased in value by 27.9% since 1/1/2012, whereas the next 200 stocks that make up the Small Ordinaries only increased by 10.6% for the same period. During 2012 the Small Ordinaries also had a lot more volatility, making an intra-year low some 20% below its initial peak whereas the ASX-100 dipped about 10%. The last year has been a story of yield chasing and had you been out of those top 10 stocks, like the banks, then your returns will be somewhat different to what mainstream media is suggesting.

Back in his January 21st review Pete suggested that the Banking Index should move sharply toward the upper target of 6000 being new post-2007 highs. That level was attained last week and follow through has continued on back of today's CBA record profit announcement. Wave equality for the second corrective pattern stands slightly above current levels at 6154. His biggest concern was the ability to enter the index with a low risk pattern and he was spot on the money - the market almost moved in a straight line higher without the slightest hint of a minor pullback. On the very larger time frames, and being reiterated on these daily charts, is that this move higher remains a bear market bounce and not a new bull market. Yes, we may go higher, but longer term strength should not be sustainable.

Trading Strategy

If you hold banking stocks we suggest tightening up trailing stop losses, although we expect to continue to see upside until yields are lowered. At that time we should see broader market buying enter and drag up other areas of the ASX that have been lagging for the last year or two. We retain a very bullish stance for the remainder of 2013 with the All Ordinaries expected to move toward 5600. In the coming weeks we will be reviewing the very large picture via our limited edition Special Reports. The August 2011 Special Report positions remain in play.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Misplaced Concerns About Central Bank Independence

By Marco Annunziata, Chief Economist and Executive Director of Global Market Insight, General Electric Co.

Economists and policymakers are increasingly concerned that central-bank independence is being threatened. This column argues that central banks are not losing their independence, but that their room for manoeuvre is being eroded by a lack of structural reforms and fiscal adjustment. The financial crisis has caused mission creep, pushing central banks well beyond their comfort zones and as the time comes to pull back, independent monetary policy could still be powerless against fiscal dominance.

Concerns are rising that central-bank independence is at risk, already curtailed by governments eager to control all other levers of growth. The Japanese government’s none-too-subtle strong-arming of the Bank of Japan is one of the most blatant examples (e.g. King 2013).

But the current debate on the risks to central-bank independence misses the point.

Central-bank independence has already been compromised by the financial crisis and by recession. The issue is not independence de jure (there has been little change there); the issue is independence de facto. Central banks do not act in a vacuum. The financial crisis has caused ‘mission creep’, forcing a number of advanced country central banks to venture into uncharted territory: they have massively expanded their balance sheets, accepted collateral of longer maturity and increasingly dubious quality, backstopped government bonds, and tried to direct liquidity into specific markets. The Fed has underwritten both the mortgage market and the government-bonds market; the ECB has stepped in to both protect and discipline high-debt countries; and the Bank of England has a launched a ‘funding for lending’ scheme to boost credit.

Victims of their own success

Yet, even as they have done a lot more than ever before, central banks have acted consistently with their mandate – that is, to avoid an economic collapse that would have sent both employment and inflation well below target. Their contribution has been invaluable, and in a way central banks are now victims of their own success: monetary policy is increasingly seen as the easy solution to all problems. And if monetary easing alone can boost GDP growth back to higher levels, why should governments take tough measures now if they can simply wait for the return of better times?

Central bankers are well aware that monetary policy alone is not enough. Monetary policy cushions real adjustment and helps spread it over time, but the real adjustment does need to happen. The ECB has been explicit about this, making purchases of government bonds subject to policy conditionality. The Fed has been softer but has never stopped reminding us that fiscal and structural policies need to do their part.

No room to manoeuvre

The problem is not that central banks are losing their independence, it is that their room for manoeuvre is being eroded by lack of progress on structural reforms and fiscal adjustment. After trying every trick in the book – and then writing some new chapters – the Fed still faces unemployment at nearly 8%. At the January Federal Open Market Committee meeting, Fed officials put on a brave face, noting that the fourth-quarter GDP contraction was due to temporary factors and that the underlying economy continues to gradually improve. This is all true, but for all that improvement they could only restate their commitment to keeping a long term ultra-loose monetary policy stance. The longer this goes on, the greater the risks of economic and financial imbalances and the harder it will eventually be to unwind extraordinary stimulus, the raising of interest rates and stepping out of mortgage and government bond markets (Taylor 2013). But unless fiscal policy helps, the Fed’s options are limited.

A game of chess

Central banks and governments are constantly sparring in a policy chess game – analysed by a long-standing game-theoretic literature. It’s a game where both players employ threats, signals and commitments. It is also a game where one or both players can turn out to be less than fully rational, at least in the strict economic sense.

Central bankers are subject to pressures from governments. But even if they were not, even if central banks where run by benevolent dictators who could refuse to pick up the phone when the government calls, they would still have to factor the government’s policies in to their own decisions.

It is hard to point to a move by one of the major central banks over the last few years as determined by government interference. Central banks' decisions have been driven first by a desperate desire to avert catastrophe. Then they’ve been aimed at fostering an economic recovery while desperately hoping that governments will do their part. I do have concerns on whether some central banks are pushing loose monetary policy beyond the point of rapidly diminishing returns, understating the risks. The Fed is a case in point. But similar concerns are voiced within the Federal Open Market Committee, and in the end the Fed is following its own assessment of risks and benefits, not following orders.

In the case of Japan, the weak growth performance and the previous strong appreciation of the exchange rate in real effective terms should suffice to justify monetary stimulus – at least when benchmarked against the Bank of Japan’s peers. In this light, the Bank of Japan’s announcement that it will target inflation at 2% (in line with other major central banks) and that it will start outright purchases of government bonds only one year from now could actually be seen as passive resistance to political pressure.

Pressures on central banks

Where central banks may find their hands tied is in the unwinding of this massive monetary stimulus if governments have not made progress in their own backyard. The Fed will eventually need to offload gigantic holdings of Treasuries and mortgage-backed securities, after having been the dominant buyer in the market for a long time. We all hope it will be able to do so smoothly, but it would certainly help if the reduction in the Fed’s demand is accompanied by a reduction in debt supply thanks to greater fiscal prudence. If the fiscal position remains on an unsustainable long-term path, the Fed will be forced to choose between two evils: tighten policy and cause a recession, or accommodate and allow higher inflation. Similarly in Europe, unless momentum on reforms at the national and EU level accelerates, the ECB will eventually have to choose between bailing out undeserving governments and risking another surge in Eurozone disintegration risks. Both banks may end up being accommodating, but this would be choosing the lesser evil in response to government inaction, not following orders.

Conclusions

I am not arguing that central-bank independence is irrelevant. On the contrary, the fact that in normal times central banks can pursue prudent monetary policy rather than serving as daily lenders of last resort is extremely beneficial. The fact that central banks, armed with deep professional expertise, can publicly advise and criticise governments contributes to a more informed debate and better policymaking. Having qualified professionals directly in charge of a key area of economic policy is reassuring, just as you would want doctors in the hospitals even if it’s politicians who design the national healthcare system. Central-bank independence should be preserved.

But central-bank independence is powerless against fiscal dominance, and this is the true problem we face today. Instead of fretting about whether central-bank independence is on the way out, perhaps we should discuss whether any part of fiscal policy could similarly be delegated to a qualified independent agency.

References

King, S (2013) “Era of independent central banks is over”, Financial Times, January 10.

Taylor, J (2013) “The Fed policy is a drag on the economy”, The Wall Street Journal, January 28.
 

Marco Annunziata is the Chief Economist and Executive Director of Global Market Insight at General Electric Co. In his position, Marco is responsible for global economic, financial and market analysis to support GE’s business strategy. He is a member of the ECB’s Shadow Council. His book The Economics of the Financial Crisis has been published by Palgrave MacMillan (2011). He holds a PhD in Economics from Princeton University and a BA in Economics from the University of Bologna.

Republished with permission from the publisher. Copyright VoxEU.org - the above story was originally published on www.VoxEU.org - readers reading this story through a third party channel may find that any graphs are not included (our apologies for this technical anomaly) - here's a link to the original story on the VoxEU website: click HERE

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Why Flexigroup Equals Flexi-Buy

By Andrew Nelson

Leasing and financing services specialist Flexigroup ((FXL)) put out yet another positive financial report last week and brokers did what they tend to do; they applauded the report, maintained their Buy calls and lifted their forecasts. But Buy calls can’t last forever and earnings can’t be perpetually upgraded, or can they? We take a good look broker commentary to see why forecasts and recommendations have been and remain incredibly positive.

It’s easy to pin down at least one reason why brokers responded well to last week’s interim report. As Credit Suisse noted, first half numbers put the company on track to hit the upper end of management’s 11%-16% earnings growth guidance range for FY13. However, the broker can easily one-up that achievement, noting current underlying organic growth is actually running at around 17%-20%. Thus, Credit Suisse thinks FY14 EPS estimates, if anything, are too low and is pencilling in 20% EPS growth for the period.

UBS pegs the result at 16% profit growth on last year’s first half and this is despite up to $4m being spent on new products and efficiency programmes. The broker notes that Certegy was once again the major contributor of growth. It now accounts for the bulk of the company’s revenue and has also pushed the total book past $1bn for the first time ever.

The broker figures the current net profit growth rate at 14.8%, which compares quite favourably to guidance at 11%-16%. No wonder UBS thinks the FY14 target should be an easy hit. What’s more, the broker is also expecting more progress on efficiency gains in processing and Lombard, which further supports the double-digit growth forecast for FY14. UBS also sees further ABS issuance over the next 6-9 months, meaning funding costs will continue to decline.

Incoming CEO Tarek Robbiati summed it up nicely, saying there is “no need to change a winning formula” and UBS agrees heartily. In fact, the broker expects new product innovation and organic growth will remain the priority. Thus while the stock has admittedly re-rated in the not too distant past, the values of the book, M&A opportunities and the potential of new products mean a Buy is the only right call, says UBS.

Deutsche Bank is a little less glowing in its assessment, with net profit coming in 5% below the broker’s forecast. The miss was mainly due to higher costs and weaker volumes at Flexirent, although Certegy profit was also a little weaker than expected due to additional marketing cost. However, the broker also thinks any concerns about a slightly soft Certegy are unfounded, given the improved returns expected in the second half.

The broker also notes that volume growth is at this point a much better indicator of performance and given this is running at 22%, upgrades to FY14 earnings are warranted. Of note is that emerging areas of the business are also performing, with UBS seeing this as building a solid platform for continued earnings growth over the mid-term.

Analysts at Macquarie are also big fans of Certegy and on their numbers the 31% lift in net profit, the 22% lift in volume and the 29% rise in receivables added up to a very strong result. Lombard is starting to make a more substantial impact, and lower borrowing costs from securitisation and reduced base rates are starting to filter through.

The broker expects the company’s newer initiatives, which leverage current core infrastructure, will soon be providing another leg to growth. Much like Credit Suisse, Macquarie also thinks near term PE multiples appear a bit full, but much like Credit Suisse, Macquarie also remains attracted to the FY14 earnings growth on offer.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Blue Skies for Insurers, Or Not?

- History suggests insurers should enjoy a positive earnings cycle ahead
- Weather remains the big unknown
- No support from rising interest rates in sight
- Stockbrokers line up their sector preferences

By Greg Peel

A week ago the Citi analysts were looking at numbers which suggested $250m might be the upside cost to insurers from Tropical Cyclone Oswald and its aftermath – that which provided recent heavy east coast rain in Australia and a second year of heartbreak, in three, for many SE Queenslanders. As one typical Queenslander put it on the news, “We had a 100-year flood in 2011 and another one in 2013. What the hell does 100-year flood mean?”

By mid last week insurers were talking a cost of $300m, before reinsurer Munich Re responded with a $500m estimation. By week’s end, notes BA-Merrill Lynch, insurers were preparing for even more still. Suncorp’s ((SUN)) current catastrophe claim budget for the second half of FY13 is $250m. Merrills is factoring in, for Suncorp specifically, $140m from floods, $40m from bushfires, $100m for net claims of under $5m and $70m for other events, totalling $350m.

2011 represented the second worst year for catastrophe insurance claims in Australia in four decades. Far and away the worst, in 2011 dollars, was 1974 (Brisbane flood, Cyclone Tracy), while 1999, 1989 and 1984 all represented noticeable catastrophe “spikes”. For no particular scientific reason, it is extraordinary how each of these five spike years ushered in a suddenly very low catastrophe period in ensuing years. And to maintain this trend, the year 2012 featured very low claims levels too. If history is any guide, insurers should be able to look forward to a period of minimal claim levels ahead.

Which means that 2013 to date must have insurance companies feeling a little queasy.

The two most fundamental drivers of insurance company earnings are interest rates – and we’ll get to those shortly – and the catastrophe claim cycle. As long as “cat” claims maintain their cyclical trend – peak years followed by periods of calm – insurance company earnings will also cycle. When insurance companies suffer peak cat years, they burn or overshoot reserves and are faced with higher reinsurance costs ahead. However, peak cat years also give insurance companies an excuse to raise premium rates, which has two benefits. The first is to help them re-establish reserves.

The second is the opportunity to increase profit margins given the new, higher premium regime will remain in place throughout the subsequent cat claim trough. Hence insurance companies typically post their best results (notwithstanding interest rates) in the years following a peak cat year.

Peak cat years also tend to be wet. While bushfires are no less tragic, floods are financially more devastating and indiscriminate. Wet years also multiply motor accident claims. It was only a decade or so ago we learned of this rascal of a young boy called El Nino, and we cursed him for a long and soul destroying drought. By last year we had become equally frustrated with his no less disobedient sister La Nina, to the point we all sighed with relief when the Department of Meteorology told us recently El Nino was on his way back. Better still, we might even be due for a “neutral” period in Southern Oscillation Index terms, in which both children are sent to their rooms.

Having crunched the numbers and adjusted to 2011 levels, JP Morgan analysts calculate that the average cost of claims in Australia is $1bn per year, dropping to $0.8bn in neutral years but rising to $3bn for La Nina periods.

The question for those looking to ride the insurance cycle upswing (further) is thus: has La Nina really gone away for now? The people of Bundaberg, for one, might not believe so.

Trust in the cat-related insurance cycle requires a level of faith. But that doesn’t mean science has not taken the issue of El Nino and La Nina further. As I wrote in June last year (Herding Cats), making reference to an article I wrote in February 2011, a yet to be universally accepted theory is that the shorter, sharper Nino-Nina cycles are overlaid by longer cycles of  wet and dry. Major droughts tend to occur, history has indicated, when El Nino arrives within a longer dry cycle. Major floods occur when La Nina arrives in a wet cycle. The other way around, the impact of either is tempered. The question is: having endured the most recent long dry cycle (which included a decade of drought,) have we now entered a long wet cycle? The 1974 floods and cyclones occurred when La Nina arrived in a long wet. The 2011 floods, followed closely now by the 2013 floods, hint that the long dry, the end to which was overdue, has quite possibly given way to a new long wet.

If so, El Nino will not have much of an impact if he is indeed heading this way. La Nina, on the other hand, will certainly not be welcome.

It is not only insurers who have been a little spooked by the 2013 weather to date -- insurance sector analysts are also experiencing just a little doubt.

Insurance companies do not price their premiums such that there will always be enough money to cover claims even in peak years, leaving the rest as profit. The business is too competitive to allow that luxury and besides, insurance would be way too pricey for most customers against the risk. Hence it is insurance companies who must take the risk and run a fine balance between premium prices and reserves. Fundamental to maintaining sufficient reserves, while at the same time operating profitably and paying attractive dividends, is the investment of premiums collected. Insurers must invest their cash to beat inflation and provide for “long tail” claims, such as life insurance, down the track.

Insurance companies are not cowboy punters. They invest in mostly government and semi-government fixed income assets. The Australian ten-year bond yield has been trading at historic lows in recent times. Elsewhere in the world, real rates (net of inflation) are negative. Until the interest rate environment changes, insurance companies will struggle to secure investment returns.

Weather is in no way correlated to global monetary policy. Hence those analysts who are positive on the prospects for Australian insurers over the next few years are putting faith in a cyclical return to a period of low cat claims. Business-related claims are, however, very much beholden to the economy. That we are now seeing an unprecedented level of global central bank monetary policy easing is a reflection of the GFC and its lengthy fallout. That we are now seeing a return to risk appetite among investors suggests easy policy might just be starting to work. If so, business-related insurance claims should fall in the years ahead.

So if we take the prospect of lower cat claims, lower car accident claims in drier weather, and lower business-related claims in a healthier economy, and assume other claims such as life insurance follow a steady trend, and combine those with higher premium prices charged, insurance companies should indeed be looking at a period of higher margins and profits ahead even if interest rates remain low.

Morgan Stanley suggests insurance underwriting margins, and hence earnings, are not yet at their peak in Australia and believes there is room for upside surprise. The peak should hit in FY15, the analysts suggest, by which time global interest rates should begin to recover to deliver further upside potential.

Morgan Stanley also notes that the last positive cycle for insurers, 2002-05, was enhanced by strong reserve releases due to tort and regulatory reform (following the collapse of HIH) which laid the foundation for a more favourable industry structure. There followed the GFC of course, and collapsing interest rates, and then the recent cat spike, so only in this next cycle, perhaps, can insurers begin to enjoy the spoils of reform.

This only leaves interest rates as the issue, assuming cat claims behave themselves. JP Morgan notes yields on insurance sector investments were around 1.2% lower at the beginning of 2013 than the beginning of 2012. “For long tail products, where claims generally take longer to settle,” notes JPM, “this can make substantial differences to returns in the absence of adequate premium rate increases”.

Judging by yesterday’s Reserve Bank policy statement, the Australian cash rate still has room to fall from here (3%) before any talk of it rising. The US Federal Reserve recently switched to a target of 6.5% for the US unemployment rate, from a previous “not before mid-2015”, as to when its funds rate could be lifted from its current zero-0.25% range. It is assumed the ECB will eventually need to cut from its current 0.75% rate. The UK is at 0.5%, Japan 0.1%, Switzerland zero, Canada 1%, and even India saw a rate cut last month, just to name a few.

Global interest rates will rise down the track, and quite possibly very quickly. But not yet. Hence the completely unknown factor of “the weather” is even more important than under “normal” circumstances.

As we await earnings reports from the major insurers this month, we must also note that they have already enjoyed share price bounces off earlier lows, to varying degrees. This has quite a bearing on revised broker recommendations.

Citi rates Suncorp as its only Buy in the insurance space, despite the recent strong rally in share price. AMP ((AMP)) comes in as second preference with a Neutral rating, bearing in mind that AMP is weighted towards life insurance and that its wealth management business is what is currently driving the share price. The analysts are expecting a solid earnings result from Insurance Australia Group ((IAG)), but believe valuation is stretched at the current share price. Hence Neutral. QBE Insurance ((QBE)) needs to strengthen its balance sheet and reduce costs, and the analysts are hoping for such news at the upcoming earnings release. In the meantime Citi thinks it’s too early, and rates QBE Neutral and fourth pick.

Merrills also has Suncorp (Buy) as first pick followed by AMP (Buy). Insurance broker Austbrokers Holdings ((AUB)) comes in third with a Buy followed by QBE (Neutral), IAG (Underperform) and NIB Holdings ((NHF)) also on Underperform.

Morgan Stanley differs slightly in suggesting it is Suncorp which has run too far, while IAG, albeit not as attractive as it was, still has upside potential. MS agrees with Citi that QBE “demands patience” but disagrees on AMP, feeling the stock is now fully priced. The analysts’ order of preference is thus IAG (Overweight) at number one followed by QBE, Suncorp and AMP, all on Equal-weight. “Equal-weight” is the equivalent of “market-weight” or Hold/Neutral. Morgan Stanley's industry view is "Attractive".

Turning to the full FNArena broker database, FNArena’s Stock Analysis shows Buy/Hold/Sell ratios for the aforementioned stocks as follows: SUN 5/2/1; AMP 3/4/1; AUB 3/1/0; QBE 2/6/0; IAG 1/5/2, NHF 1/2/1.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Assessing Another Queensland Flood

-Insurers can withstand this flood
-Flood impact worst for Suncorp
-Minimal impact so far on mines
-Some coal haulage delays


By Eva Brocklehurst

Whatever the weather we'll weather the weather, whether we like it or not.

A rhyme from schooldays sums up the outlook of insurers for the first month of 2013, replete with fires and floods. This week's Queensland floods are somewhat of a problem for coal miners and haulage companies too, given the coal-intensive Bowen Basin has copped it again.

For insurers it looks like a 'modest' impact for Insurance Australia Group ((IAG)) and QBE ((QBE)) and 'significant' for Suncorp ((SUN)), with its heavier Queensland exposure. Nevertheless, Goldman Sachs believes, for Suncorp the impact will be less than 2011 because the capital, Brisbane, was greatly affected back then. Suncorp's worst case net cost is $250 million and while this may not be reached the broker expects the large claims will come in over budget in the second half, countering a benign first half. Deutsche Bank concurs, noting 22% of Suncorp's gross written premium comes from Queensland.

On FNArena's database Suncorp has five Buy ratings, although many of these have not been re-evaluated since the flood. Nevertheless, BA-ML, which has re-visited the stock, has retained a Buy rating and confirmed Suncorp as its number one pick in the insurance sector, believing there is more upside due. BA-ML raised the price target to $11.40. The price targets range from $10.11 (JP Morgan) to Citi's $12.20. Macquarie is the one with a Sell rating, having said earlier this month that it needs to see material improvement in the company's performance to change its opinion.

QBE's maximum event retention is $200m but Goldman considers it unlikely that figure will be reached and QBE is well able to absorb the costs in its global budget for losses. Deutsche Bank sees QBE's Queensland exposure as entailing just 3-4% of gross written premium. QBE has six Hold and two Buy ratings on the FNArena database.

In terms of IAG, this company will wear a larger share of claims in northern NSW's flood affected region but, overall, claim values are seen as modest. Deutsche expects that IAG's conservative catastrophe budget, $320m per half, should leave ample room. UBS says it's too early to assess whether Suncorp and IAG's single event retentions will be breached but they both should have room within their natural peril allowances. The broker cut the sector to a Hold rating last week and retains a Sell recommendation for IAG and Hold for Suncorp and QBE. On FNArena's database for IAG there are five Hold ratings, two Sell and one Buy (JP Morgan). The price target ranges from $4.40 to $4.90.

Goldman Sachs believes the miners will be affected to a much smaller extent than in January 2011, when three quarters of  Queensland was declared a disaster, with preliminary estimates of one million tonnes of coal shipment being held up because of transport and production disruption.Companies affected include Asciano ((AIO)) but here the impact is considered minimal as take-or-pay contracts are robust and Queensland coal accounts for only 15% of earnings. For Aurizon ((ASJ)) it is a bit greater as 30% of its earnings are derived from Queensland coal haulage. While it's too early to assess, Goldman observes that flooding has had more impact on rail haulage of coal rather than the mines.

Deutsche Bank notes the Blackwater and Moura rail lines have been closed and these account for 30% of Queensland's coal rail capacity. The broker expects the impact to be immaterial for AIO while Aurizon might see a 3.3% detrimental impact on FY13 earnings if the line is closed for a month or more. BA-ML has evaluated the impact on mining areas in Queensland and NSW and notes there are minimal impacts at this stage, with Moranbah in Queensland and Gloucester Basin in NSW having the greatest potential for disruption. Again, it's the coal haulage and the Port of Gladstone which are most affected with shipping delays. However, BA-ML warns it is easy to underestimate flood impacts, noting Aurizon's initial assessment for FY11 was 15-20m tonnes affected and that ended up being 37m. Moreover, it's only January. February and March are the wettest months in Queensland.

A third category of potentially affected stocks is agricultural fertiliser suppliers, hence Incitec Pivot (((IPL)). Goldman notes that around 50% of the company's Dyno Asia Pacific earnings are generated from flood affected areas. However, fertiliser consumption was already down with respect to the summer crops because of lower plantings. The impact of the flood on FY13 earnings is considered negligible.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

CommBank Still Destined For Higher Level

14/1:

LAYMANS:

There aren’t too many of the larger cap stocks that can boast reaching all-time highs but that’s exactly what Commbank ((CBA)) achieved last Monday. Out of all the banks this company has continued to outperform with absolutely no reason why this trait can’t continue into the future. However, we mentioned last time that a significant zone of resistance was looming which portended to a reversal of form. Although the current pull-back has only been unfolding for a few days the ideal situation is to continue lower toward our target area as annotated. We have to remember that the trend since late August of last year has continued pretty much unabated with little in the way of corrections. There is nothing concerning about this whatsoever though at some juncture a pause for breath and slightly deeper corrective movement needs to unfold to keep the symmetry of the patterns intact. We’re certainly in a position to see a longer period of consolidation or possible deeper pull-back. Longer term there is still plenty of upside potential ahead and once those all-time highs are overcome the door opens for a continuation up toward $76.00 which is a move worthy of being involved with. For now though we have to be open to the possibility that price could roll-over a little further before the next buying opportunity arises.


TECHNICAL:

There was always a possibility price was going to tag all-time highs before reversing and as can be seen that’s exactly what’s unfolded. Also note that volume increased slightly during the recent reversal which always suggests the selling pressure is little more significant. In regard to our wave count nothing changes with the expected 5-wave movement up from the low of wave-(X) looking to have terminated last week. Remember, bigger picture we’re looking for a complex combination pattern to continue to evolve though this doesn’t detract from the upside potential that’s lays ahead. Right here and now though we’ve pencilled in wave-A as being in position meaning the perfect world scenario is to see a symmetrical (a) – (b) – (c) correction to the downside which should terminate in the typical 50.0% - 61.8% retracement zone which means price heading down toward $58.00 as a minimum. It’s not going to happen overnight and should take three or four weeks to complete as a minimum. As mentioned last time overlapping wave structures have been dominating over recent months meaning a corrective pattern higher is unfolding. We do have some confluence between $76.00 - $78.00 meaning it’s a longer term target to focus on. In fact the upper boundary of that target could be tagged and still remain in a corrective pattern which just emphasises the fact that choppy price action doesn’t necessarily mean the trend can’t continue. It certainly can as is evidenced by the chart here. We are obviously wrong in regard to a pull-back if the high of wave-A is overcome immediately though it isn’t our highest expectation.
Trading Strategy

14/1:

Our strategy last month was to await a symmetrical retracement once an interim top was put in position. Now that a high appears to have been made we just need to sit back and let the patterns run their course. Should a symmetrical corrective pattern terminate in the typical retracement zone then strength would be reason to initiate new positions. The target area remains as mentioned above circa $76.00 with a chance that slightly higher levels can be tagged before a more substantial correction takes hold. Aggressive nimble traders looking for short positions should wait until Wednesday’s low at $60.93 is breached before jumping on although just be cognizant to the fact that we aren’t looking for substantial falls here. In the current market environment I think the better option is to wait for the buying opportunity a little further down the track.

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Switzer Super Report: Predictions for 2013

By Peter Switzer, Switzer Super Report

Bob Doll used to be chief equity strategist at BlackRock, the biggest fund manager in the world but now is at Nuveen Asset Management. He has been a legend of the US stock market and his predictions have been closely watched over the years.

Some critics say he has not been performing well lately but I relied on him, when too many experts were super negative on stocks in the 2009 — he even gave me guts in 2008 to look for the positives that could turn the market around by March 2009.

In fact I interviewed him, when I took my Sky News Business program to New York in 2010, in the BlackRock boardroom which had a table as long as a 25-metre swimming pool!

A good year

This is what he predicts for this year and I will throw in my two pence worth as well.

He predicts a new all-time high for the S&P 500 “some time this year”, which is only 6% away. I think the US market will do better than this, but there will be some moments when I will have doubters — I could even doubt it! Or maybe not — but I reckon the Yanks do well and we even do better.

He believes large multi-national companies that rely on emerging economies will do well this year. This augurs well for local companies such as BHP Billiton ((BHP)) and Rio Tinto ((RIO)) if he is right and once again I support his view on up and coming economies. The IMF also believes ASEAN countries will return to pre-GFC growth rates and this means more modernization and that means more steel which helps coal and iron ore.

Top sectors

On the sectors, he is pro-cyclical and if we see a big year in stocks, which is due, then these sorts of companies are likely to do well. Doll likes Tech companies, industrials and those with positive cash flow to buy stocks and raise dividends.

He thinks banks and financials will do OK, but “won’t lead the race” and I think that’s a good call for Australia. I would buy financials on any silly dip or maybe a takeover target.

Improving growth

He expects US and global growth will be better in 2013 and I support this view but importantly he told CNBC that “the perceptions of growth” will improve so businesses and investors will be more confident about the future of their operation and where P/Es are going, that is up!

This is a big issue for 2013 and we will see this here in Australia as well despite the Treasurer, Wayne Swan, backing away from his surplus promise, which will be good for growth and even with an election year ahead.

Less fear this year

He is arguing there will be a “little less fear in 2013” and we will see things like more M&A activity, which not only reflects more confidence but helps share prices.

He is cautious about being too cautious on defensive stocks but that could provide value for the long-term player who wants dividends more than capital gain, while they would cop it if it comes along.

He thinks dividend increases will be at a double-digit rate which looks huge for the likes of Telstra ((TLS)) here and so I would rule this one out as a general prediction but many cyclical companies that have not even paid dividends lately could easily return dividends this year. I expect better dividends from many companies if the stock prices are rising and economic growth picks up over the year.

On interest rates

Doll also expects long-term interest rates to rise in the USA. In Australia I think we will see rates fall for home loans, however longer term rates could sneak up but only slowly as we get to year’s end. For this to happen we would need to see a big spike in stocks, which is definitely possible.

Bob Doll might have had some years where he has not performed as well as other fund managers and equity strategists but his history is there to look at and as a legend of the stocks game I’m prepared to take his tips, especially when they mirror my own views!

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The scoreboard:

-          The ASX200 closed down 10 points or 0.23% to 4623

-          The AUD fell sharply lower at midday.. Currently reading 1.0451 vs the USD

-          Total volume for the day was $8.3B. Less the influence of premarket options exercise ($3.3) gives a real volume figure of $5B.

It was a rollercoaster ride on the final major trading day for the year as the ASX reversed early gains at midday after an 11th hour vote was pulled by House of Representatives speaker John Boehner who was unable to muster majority support  to avert a possible fiscal cliff disaster.  The vote was supposed to extend Bush era tax cuts on incomes below $1m and allow higher tax rates for incomes above $1m. Boehner and Obama remain at loggerheads over the threshold at which the tax hikes will come into effect. Obama wants higher taxes on income above $400,000 where Boehner remained fixed on only agreeing to increases above $1m.

The market is all too aware that time is running out to resolve the crisis as most politicians will take holiday from today. Our market jagged 40 points lower on the news before financials and defensives regained traction and slowed the fall in the final two hours of trade. The news sent DOW futures plunging 220 points on the failed vote and remained down around 200 for most of our session.

The finale of this soap opera is anyone’s guess really. The market has a nasty habit on ‘selling the fact’ so perhaps a fall in the US market is likely even if a resolution is reached before the year end. We do know that there won’t be another House of Reps vote before Christmas so any immediate resolution remains up to Senate leader Harry Reid and President Obama. It looks as though the market is in for a good old country and western standoff. Perhaps the pollies have set the market up for one of the greatest bull traps in history. The way the US futures were looking most of the day, Iam not sure why Aussie market thinks they’re only bluffing?

If we put this noise to the side, the GDP news out of the US overnight and the reason for our market’s rise early on was due to a shock upward revision in 3Q GDP in the US from 2.7% to 3.1%.  Existing home sales also rose 5.9% in November from October, the biggest jump since 2009 and in contrast with analyst expectations of a rise of 2.3%. Both data sets are genuinely encouraging and illustrate a US economy genuinely in uptrend.

Bring on 2013, as a US economy hitting its straps and a centralised communist government willing to throw seemingly unlimited dollars on the world’s second biggest economy hopefully make the lingering GFC of ‘07 and Euro Crisis of ‘12 a distant memory.

Cliff uncertainty drove our market lower but saw cyclicals take the brunt of the fall with defensives showing good resilience. Westpac Bank ((WBC)) Commonwealth Bank ((CBA)) and ANZ Bank ((ANZ)) all showed gains of between 0.5-1%.

The big miners were the largest drag on the market. Rio Tinto ((RIO)) falling 0.90% and BHP Billiton ((BHP)) down 0.92%.

Gold struggled again today as it took another substantial hit overnight and continued slide throughout our session to $1641oz. (current pricing). Newcrest Mining ((NCM)) fell 2 cents to $22.47 and closing in on 3 year lows.

Those who remember the little animal chocolate, Yowie ((YOW)) will be pleased to hear it’s about to hit shelves again with a new and improved (child friendly) design and new listing on the ASX. YOW hit the boards today up 19,400% (reconstructed) as it unveiled a new US based production facility and a new confectionary range due out in Q1 2013. Hooray!

DOW futures are pointing to a disastrously weaker opening, currently down 195 points
 

(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

708 Capital is a full service stockbroking and investment advisory firm. 708 offers investment and market advice to high-net-worth Private and Institutional clients in Australia and across the globe. 708's extensive network of contacts gives its clients exclusive access to ground-level fundraising opportunities and new company listings in a variety of small and large cap ASX listed companies. 708 has a longstanding track record of generating exceptional returns for its clients. Click here 708capital.com.au/contact-us/ for a no costconsultation and portfolioreview or to learn more visit www.708capital.com.au. Note: 708 Capital offers wealth management services for Sophisticated and Wholesale Investors only. We can only assist investors who are classified as Sophisticated Investors or have verified assets over AUD$2.5m.

708capital is a holder of AFSL. No. 386279

IMPORTANT DISCLAIMER - THIS MAY AFFECT YOUR LEGAL RIGHTS:

This document is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

Disclosure of Interests: 708capital receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. 708capital and its associates may hold shares in the companies recommended.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.