“Today, if you asked me bluntly whether I would invest in banks or insurance, I would say insurance,” said de Blonay, a fund manager in the firm’s global equities division.The UK insurance sector as a whole has more breathing room under the current post-Brexit pressures, as many of them have major non-UK earnings streams, explained de Blonay.
Unlike the major UK banks, which posted significant profit losses over the first half of the year, UK-listed insurers produced decent first half results that included confident outlook statements post-Brexit from management, said de Blonay.
Although the macro backdrop post-Brexit is far from clear, de Blonay is inclined to believe the effects of Brexit will be manageable for insurers with UK earnings, even if the country enters a period of mild recession.
“I would continue to favour defensive stocks in this backdrop that are non-life insurance with non-EU earnings like RSA Insurance which is a big component of my portfolio,” he said. “With Steven Hester at the helm, it has earnings in Scandinavia and Canada and just a small portion in the UK. It is in restructuring mode and has a juicy earnings forecast for the company and its divided per share growth.”
Of the UK-listed life insurers, de Blonay said he is monitoring Prudential with great interest. “Prudential is in a similar vein to a company I do hold, AIA, because of its Asia focus. It benefits from this Asia angle, which is why I would consider putting it on my list as a life insurer with non-EU earnings.”
The situation for UK banks is not necessarily one of doom and gloom though, said de Blonay, especially if you take stock in the current macro data which suggests that at worst we will endure a mild recession during the second half of the year.
The BoE’s autumn statement will also serve as an important catalyst in determining short-term valuations in the banking sector, said de Blonay. Specifically, the prospect of further rate cuts and the initiation of fiscal stimulus could change the outlook for the sector for the worse.
While another round of QE would put further pressure on banks in the UK, said de Blonay, the fact Carney has explicitly said he was ruling out negative interest rates provides some comfort.
“Carney is concerned over what entering negative territory might do to the banks’ profitability,” said de Blonay. “It is clear that the ever lower interest rate environment is not good for the banks but the assurance he's not contemplating negative rates is also a relief.”