Fidelity is betting on gains for insurance firms in its Australian equity portfolios, at the expense of the big four banks.
In a roundtable, portfolio managers discussed where the firm’s three Australian equities funds are favouring investment.
One preferred area is insurance where it holds stocks, such as QBE and Suncorp.
The $5.4 billion Fidelity Australian Equities Fund has a 5.7 per cent weighting to Suncorp, which is in the process of divesting its bank to ANZ and has benefited from the rise in insurance premiums.
Casey McLean, portfolio manager of the $231 million Australian Opportunities Fund, which holds a 4.4 per cent weighting to QBE, said: “We think the insurance sector is one of the beneficiaries of the current inflationary environment as inflation means insurers are able to increase their premiums.
“We are also experiencing a high level of natural disasters, both in Australia and in markets like the US, which pushed up claims inflation, reinsurance rates and, ultimately, insurance premiums. Further, a higher interest rates environment means insurers are able to earn good returns on the investment of premiums. Overall, the outlook for their earnings looks pretty strong over the medium term.”
Shares in QBE have risen 19.5 per cent while Suncorp has risen 16 per cent since the start of 2023 to 25 July.
Zara Lyons, who is also a portfolio manager on the Australian Equities Fund, explained why the investment team is reluctant to strongly bank despite share price gains recently.
“Since the RBA paused hiking rates in July, markets’ expectations for two 25 bps increases in the cash rates have eased slightly to one 25 bps increase, following a weaker monthly inflation figure. This, combined with a slight softening in competitive dynamics across both mortgages and deposits, has led to a share price rally in banks, which have outperformed the broader market over the last few months.
“However, we think this rally might be short-lived if the economy deteriorates further from here. The yield curve continues to be invested, implying that the market expects slowing economic growth in the future and potential easing in policy rates.”
As to areas outside of insurance, Paul Taylor, head of investments, said the funds are also exploring consumer essentials such as telcos and supermarkets and non-iron ore commodities firms which are less economically sensitive.
This includes weightings to Woolworths and Telstra in the Australian Opportunities Fund, and Coles and Ramsay Healthcare in the Australian Equities Fund.
Taylor said: “It is a difficult environment. Currently, we are in the longest lead-up to a recession and only in recent months with the latest interest rate hikes did consumers start getting the memo about it.
“We are invested in essentials such as supermarkets, telcos, healthcare.
“People used to have, say, $50 to spend on essentials and that has risen to $60 with rising inflation, and that spend has to happen regardless which is leaving them with less money for discretionary goods and services, so we are avoiding those.”
