The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.
The first thing you need to ask yourself is: why I would want to buy this stock, given the magnitude of the downgrades and lost confidence from the investment community?
It’s a similar concept to Newcrest over the last few years; where investors will now wait until they gain confidence that the insurer can over-deliver, before going overweight on this name again.
Investors will be questioning whether the firms target to achieve 10% insurance margins in 2014 is realistic – and there’s currently no unanimous answer.
This really is the main question that will drive the share price in the coming days, and I am fairly cautious because of this issue. The bulls will feel 10% margins next year is realistic, while the cynics will be pointing to the fact that the review of the US business is not fully complete and we could see further downgrades, and thus will hold off until clarity prevails.
The prospect that we could now see ratings agency S&P move QBE to negative credit-watch is real, and whilst share prices will generally not be materially affected by a downgrade to its rating, QBE is a slightly different story given its reliance on the bond market.
QBE was loved in the market, not just because of the compelling macro story (QBE does very well in a rising bond yield environment), but because most analysts were seeing a positive micro (company specific) investment case as well. The question now is how much longer the liquidation lasts, and it’s this point that makes me nervous to jump into long (buy) positions.
We’ve seen changes at the top as well, with Marty Becker replacing Belinda Hutchinson as Chairman, and while this may be seen as a positive longer term, in the short-term it adds to uncertainties.
One thing I like is the fact that QBE’s balance sheet is still in fairly healthy condition, and at least we shouldn’t see any capital raisings in the foreseeable future.
From a macro perspective tapering seems to be coming in the next few months, however price action in the bond market is fairly tame and looks fully priced in. It’s not until we see the market pricing in a rise in the Fed funds rate that US bond yields (on the ten-year)will really spike to 3.5%. This will be positive for QBE.
So with all these factors in mind, my bias is to hold off from buying in the short-term until I can see more convincing signs that the liquidation is over and a snap back could be due. There will be a number of investment managers waiting to buy at the right price and a fall to $10.00 in the coming days would, in my opinion, offer a very good buying opportunity - although there will be possibilities of intra-day trading opportunities ahead of this. With brokers revising price targets down dramatically, a move to $10.00 would also coincide nicely with a round of upgrades to buy, given the distance to their expected price targets.
A limit to buy QBE at $10 is fairly optimistic, so I will continue to watch price action and look for opportunities, and with the RSI at 14 we could see the really aggressive buyers move in sooner rather than later.