Financial Services: Mark-to-market and sector earnings changes

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
18 January 2021, 9:00 AM
Sectors Covered:
Insurance and Diversified Financials

  • We update our Insurance/Diversified Financials sector earnings on a mark-to-market and a broad review of our earnings assumptions.
  • We see a broadly difficult reporting season for the Insurance/Diversified Financial stocks with headwinds existing from factors including lower bond yields, some insurance catastrophe activity and COVID-19 impacting activity levels & provisioning (e.g. business interruption claims), etc.
  • We make a range of earnings changes across our coverage universe (login to view target prices).
  • Our sector ADD calls are Zip Co (ASX:Z1P), QBE Insurance Group (ASX:QBE), Computershare (ASX:CPU), Mainstream Group Holdings (ASX:MAI), Kina Securities (ASX:KSL), Moneyme (ASX:MME) and Suncorp Group (ASX:SUN).
  • We move Australian Securities Exchange (ASX:ASX) from a REDUCE to a HOLD recommendation in this note.

Summarising investment market movements

The key investment market movements for the half year ended December 2020 were:

  1. Australian and major global equities indices rising by 5%-25% for the half, including by an average of ~12% in the last quarter;
  2. AUD, USD, GBP 3-year bond yields reducing ~1-15bps; and
  3. The AUD strengthening 12% against the USD, but only gaining marginally against the GBP and NZD (~1% respectively). 

Result period thoughts

We see a broadly difficult reporting season for the Insurance/Diversified Financial stocks with headwinds existing from factors including lower bond yields, some insurance catastrophe activity and COVID-19 impacts on activity levels & provisioning (e.g. business interruption claims), etc.

Of the large cap stocks, we see the Health Insurers, ASX, and Challenger (ASX:CGF) as best positioned to produce the most solid/stable results, although even they
seemingly face pressures (e.g. claims inflation for the Health Insurers, etc).

The Buy-Now-Pay-Later providers, (Afterpay (ASX:APT) and Z1P), remain the shining lights in the space with robust sales momentum the obvious highlight, albeit with limited profitability achieved so far.

We also remain optimistic on some of our smaller cap names (KSL, MAI and MME) delivering impressive results.

For stocks currently under acquisition bids (Link Administration Holdings (ASX:LNK), AMP Ltd (ASX:AMP)), updates on the progress of these arguably overshadow any upcoming result outcomes, in our view.

Changes to forecasts

We make a range of earnings changes across our coverage universe (login to view target prices). With numerous stocks providing recent market updates, we think most negative news items have been flagged, which will shift the results season focus even more to outlook commentary than usual.

Sector order of preference

Our sector ADD calls are Z1P, CPU, LNK, MAI, KSL, MME and QBE. We move ASX from a REDUCE to a HOLD recommendation with this note, with the ~25% retraction in ASX’s share price since its September high meaning it trades closer to fair value in our view.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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