Nils Bosse Parra, ODDO BHF Asset Management.
Rising interest rates - opportunities for insurance companies
Since the beginning of the year, the increasingly pronounced turnaround in interest rates in the USA has triggered heavy losses on the stock markets. There was also a rotation into cyclical value stocks, which was challenging in the short term for our investment approach, which is geared towards high-growth quality stocks. Technology stocks, whose high valuations reflect profits far in the future, were particularly affected. These valuations came under increasing pressure (via the adjusted discount rate in analysts' models). Value stocks, such as banks and energy shares, on the other hand, were sought after. In contrast, the fundamentally good outlook for many companies did not play a role in the past month. But even in value phases, we find stocks with our investment approach that meet our standards. These include, for example, insurance companies, a sector that we have recently expanded in the portfolios of the Polaris funds.
Stable dividend yield
Like banks, insurance companies also benefit in a phase of rising interest rates from the fact that newly issued bonds with higher yields come onto the market. For example, the German insurance company Allianz has been one of our core investments for several years. The company not only offers a favorable valuation relative to the overall market but is also characterized by a dividend that rises steadily in line with profit development. The company's goal is to grow the dividend by at least 5% per year in the future. With a dividend yield of currently over 4%, this pleases shareholders, especially with a payout ratio of only 58% of profits.
Growth prospects in Asia
Besides European insurance companies, however, it is also worth taking a look at Asia, which many investors had recently avoided. After the strong correction of the markets, many companies are currently favorably valued in international comparison. Here we find AIA, one of the leading Asian life insurers with a presence in 18 Asian growth markets, from Hong Kong, China and Thailand to Singapore. Asia is the world's most interesting growth market in the insurance sector. The ongoing urbanization is causing a rapid expansion of the middle class. This leads to the structural growth of the proportion of people with higher incomes and savings rates as well as increasing consumption needs. The life insurance share in Asia is still at a low 1.5 % (Vietnam, Indonesia, Philippines) or 2.3 % in China. The biggest growth driver for AIA is its business in China. The company has been present in China since the early 1990s, putting it ahead of other foreign insurers that can only cover the Chinese market through joint ventures with local Chinese partners. Above an income of USD 10,000 per inhabitant, the demand for insurance products typically increases exponentially. The pandemic experience could additionally ensure that the demand for insurance coverage will increase. The company therefore currently offers two advantages in one. It is favorably valued and will nevertheless grow strongly in the future: the perfect combination of growth and value.
