Shares of this insurer are set to soar 100% as interest rates fall, Jefferies says
Shares of British insurer and asset manager Prudential could double over the next 12 months, according to analysts at Jefferies — which expect it to be a surprise beneficiary of interest rate cuts. In research published on Aug. 18, the U.S. investment bank gave the stock a target price of £13 ($16.90) — giving it potential upside of 101% at the time of the note. Prudential shares are dual-listed on the London and Hong Kong Stock Exchanges . They have a secondary listing on the Singapore Exchange and also trade as an American Depository Receipt in the U.S. Founded in 1848, Prudential offers life and health insurance as well as asset management services. It is focused on the “growth markets” of Asia and Africa and its largest operations are in Mainland China, Hong Kong, Indonesia, Malaysia and Singapore. Jefferies’ analysts described the insurer as a “stock to buy on falling rates,” noting that although financial companies typically earn more in a high interest rate environment — as they receive higher returns on premiums, deposits and invested assets — the reverse appears to be true of Prudential. This is because, “in Prudential’s case, this is a relatively small source of value relative to the underwriting profit from health and protection policies, which is immune to market movements,” they wrote. Lower yields also give the insurer a “material uplift in the discounted cash flows, making the business (and stock) appear more valuable. This is in direct contrast to almost all life insurers globally (with the notable exception of AIA),” they added. Looking ahead, the analysts say the stock “ought to outperform at lower yields, in direct contrast to almost all financial peers, which could see lower earnings and a de-rating of those earnings.” It comes as major central banks around the world are cutting interest rates, with the U.S. Federal Reserve expected to cut next month . ‘Limited competition’ Jefferies is also bullish on the insurer thanks to a bounce back in sales and growth in the Asian life insurance sector. The analysts added that Prudential faces “limited competition” in its key products of health and financial protection, which “remain underpenetrated” within Asia. Prudential recently announced an expansion to its strategic partnership with Google Cloud to build AI-powered products and applications to enhance customer experience, improve access to affordable healthcare and drive technology-powered distribution. PRU-GB YTD mountain Year-to-date shares in Prudential Despite all this, its London-listed shares have been on a downward trend, falling over 25% year-to-date. “Prudential’s shares have underperformed the SXIP YTD, driven by market concerns about the Chinese macroeconomic and geopolitical backdrop, relative to Western economies,” Jefferies’ analysts wrote. However, they added that “a stabilizing market in China, set against the backdrop of a possible recession in Western economies could prompt the market to re-evaluate the relative preference.” — CNBC’s Michael Bloom contributed to this report.
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