In fact, it boa How do you value IAG shares? Traditionally, this metric is used to provide more clarity if a company is overvalued or undervalued. This is due to the company's improving performance and attractive valuation. In respect to the latter, the broker believes the QBE share p QBE share price sinks after Federal Court judgement Due to some confusion remaining from the first test case, a second test case was established to provide further clarification around the matter.
ASX shares in the insurance sector have performed strongly this week despite rising yields and inflation concerns weighing on broader equity markets. The benchmark index dipped 0. In the morning, the tech sector was holding the index up in the green. Already a member? Log in. Time for an explanation thus. What the hell is going on with QBE's share price? Even Telstra TLS , which after all has been one of the most efficient killers of shareholders capital since listing, has never been able to match what QBE "achieved" in the 4.
The story of QBE, in my view, provides an excellent example of "reversion to the mean" and why investors should pay attention to excessive profit margins. What transpired next is comparable as to what happened after Woolworths' WOW Price-Earnings ratio hit an excessive 27 that same year: the normalisation process that followed was always going to make it difficult for the share price to not disappoint in the years thereafter.
Equally important is the observation that also marked the high point in QBE's investment yield. Insurers such as QBE collect a lot of money in advance which they park in relatively low risk assets such as government bonds. Alas, with the Federal Reserve keeping bond yields depressed since to help stimulate economic growth and support banks' margins, this has had a depressing impact on QBE's investment returns.
Owning the shares should therefore come with a personal view on US interest rates. Once interest rates start moving up, QBE is probably the highest leveraged exposure available in the Australian share market. So how come I still wasn't prepared for this month's jump in the QBE share price? I guess I was wrong-footed by yet another profit warning which led me to think that, following five years of continuous disappointment for loyal shareholders, investors would put the stock in the doghouse for longer, especially with questions remaining as to the company's adequate financial reserves and the industry's sustainable prospects in the face of changing weather patterns.
QE3 is not yet off the table thus. What I did not anticipate was that US bonds, which had risen significantly in the face of European threats to global growth, had simply risen too high and a "correction" had thus become inevitable.
That correction has occurred over the past months with the yield on 10 year US government bonds reversing from below 1. While this doesn't seem much, such reversal in yield requires quite a big sell-off from bond investors and traders.
Compare it to a sharp fall in the share price of a dividend paying stock. Add the fact that many an equities bull has grasped the opportunity to announce the start of a bear market for government bonds, UBS included, and it is all of a sudden not difficult to see as to why hedge funds and traders have been quick to jump on the beaten down QBE share price.
International research from investment bankers and brokers shows general insurers and banks are the main beneficiaries from rising bond yields, so no guessing as to why Australian banks also seem to have rediscovered some of their mojo this month. This apart from the fact the sector usually enjoys buying support when dividend payouts are on the agenda. Plus the fact that recent research by Societe Generale and Deutsche Bank suggests an improvement for the sector's margins from a relaxation in funding pressures.
Timing in the bond market is as important as it is in the equities market and with global bonds offering historically low yields it is but a genuine threat that returns from bonds this year might turn out negative.
This would be a fait accompli if bond prices would move even lower yields higher as most experts now seem to be predicting. Problem number one with bond markets in the US, Europe and Japan is that central bankers have manipulated yields to much lower levels than would otherwise have been the case. So how high yields how low prices can re-adjust before these central bankers move in is anybody's guess. Some experts estimate that even on "normalisation" US 10 year bond yields might well rise to 2.
As I explained on Switzer TV on Thursday last week, I fully agree with the fact that yields on government bonds in most developed countries have probably seen their lows for this cycle, hence why the bull market in bonds should be over.
The fact that total returns on bonds have now beaten equities over the past 30 years supports this thesis as such event is truly rare in history. However, the transition to higher yields, I believe, will be gradual and slow, once we're past this sharp re-adjustment phase.
This because economic growth in those countries is more likely to remain sub-par, plus governments have too much debt to deal with. Thus central bankers will aim to keep yields on bonds depressed for many more years into the future. For speculators in QBE this means the sharp rally we've seen this month may have further to run still, but only if US bond yields break out to the upside. This suggests that, unless we see profit taking pulling the price down, these stockbrokers will start issuing downgrades for the stock.
I can probably safely assume that most analysts have been equally left surprised by the sudden adjustment in US bond yields. By Clancy Yeates August 12, — 1. Save Log in , register or subscribe to save articles for later. Normal text size Larger text size Very large text size. License this article. Earnings season QBE Insurance. Clancy Yeates is a business reporter.
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