Week Ahead | Finding Value in a Market at Highs

10 February 2021

Global markets were higher overnight (S&P 500 index +0.7%) as markets marched higher for 6th straight session (the longest rally since August) on virus infection rates slowdown & prospects of more stimulus.

Investors ignored a a smaller-than-expected rebound in the US labour market last month, on comments by Treasury Secretary Janet Yellen that the US can return to full employment in 2022 if it enacts a robust enough relief package. In the US, all the major technology stocks that reported 4th quarter earnings last week (Alphabet, Amazon, Apple and Facebook) easily beat market expectations, with the reporting season overall again proving better than hoped.

A by-product of increased confidence in the global economy is higher interest rates – and longer term rates have moved higher in recent months in the US, Australia, and NZ. While this is not an issue in the near term with central banks remaining super-committed to low rates, we think significantly higher interest rates is a risk for markets that we will keep watching closely.  


QBE Insurance (QBE:ASX)
It is hard to find “value” when markets are at highs, but we see currently see value in QBE shares. Further, as we have discussed in the past, QBE is one of the only Australasian listed companies which benefits directly from higher US interest rates (as it improves QBE’s investment income).
In QBE specific news, QBE insurance has warned investors to expect a full year loss of about $US1.5 billion ($1.97 billion) when it reports in February. This is a result of COVID-19 related losses, Californian wildfires, the most active hurricane season on record and a massive non-cash write-down of goodwill assets in North America. The books of the insurer have been repeatedly by higher-than-expected claims from catastrophic weather and the COVID crisis.  On top of this, the insurer recently got defeated in a business interruption claims test case in the UK. To mitigate the risk QBE has expanded its risk margin provision for COVID-19 losses by $US185 million ($240 million) to include the potential for Australian business interruption claims.

QBE shares have been on the decline since December 2020 after guiding to an adjusted cash loss of circa US$780million for the 2020 calendar year, citing US$470millon of COVID-19 costs. For a second year running QBE has delivered an unwelcomed Christmas surprise, downgrading earnings off the back of reserve top-ups and higher CAT and Crop claims. While partly one-off in nature, higher claims inflation trends in the US and lower bond yields are more recurring features in our view. However, global commercial premium rate rises continue to accelerate in response to these industry-wide headwinds, with QBE enjoying an average 9.8% premium rate rise in the 3rd quarter and flagging rate acceleration across all regions in the 4th quarter of 2020.

We have a BUY on QBE given we feel the stock has bottomed.

Australia & New Zealand Market Movers

The Australian market started the week off with gains (ASX 200 index +0.6%) with the ASX within striking distance of its record high set in February last year.

The property markets on both sides of the Tasman are buoyant, highlighted by online real estate advertising company REA Group (REA) has delivered a strong half-year performance update, despite the volatile market conditions. The company announced operating earnings (EBITDA) of $290.2 million which is up 9% over the prior corresponding period (pcp). More signs are pointing to higher prices across Australia’s super-tight housing market this year as the stampede to snap up properties continues. CoreLogic auctions data released on Monday showed there was an average preliminary clearance rate of 83.8 per cent across the combined capital cities last week, up from 81.1 per cent the previous week.

The New Zealand market was closed yesterday, after adding to gains on Friday (NZX 50 index +0.5%) in a week which saw market volatility and steadily climbing interest rates.
Long-term NZ rates continued to head higher with he yield on a 10-year government bond now at 1.4%. The yield has climbed almost 40% since the start of the year as the New Zealand economy has outperformed expectations.


3 Things Markets will be Watching this Week

  1. ​​​​​​​​​​In terms of the week ahead, the US 4th quarter earnings season rolls on, with reports due from General Motors, Twitter, Disney and Coca-Cola among the notable mentions.
  2. The US CPI (inflation) report on Wednesday will also attract more than usual interest, given simmering fear of an uptick in inflation leading to higher interest rates.
  3. Earnings season in Australia starts later this week while NZ companies start to report on Monday.


It is hard to find “value” when markets are at highs, but we see currently see value in QBE shares. Further, as we have discussed in the past, QBE is one of the only Australasian listed companies which benefits directly from higher US interest rates (as i

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