Up 20% in 45 days: Is this ASX blue chip set to soar?

What happened? The share price of blue-chip ASX insurance company QBE Insurance Group Ltd (ASX: QBE) has soared 19% in the last month and a half as the All Ordinaries has fallen 2.5%.

Why? Strangely enough QBE has been a big winner from the Donald Trump victory in the recent US elections. There are two main reasons:

  • the first is that QBE reports in US dollars and the widely-held view is that the US dollar will get stronger as Donald Trump takes office and initiates domestic-spending projects. As a result, QBE’s Australian-dollar denominated profits will be higher if the US dollar is lower.
  • the second is that a large chunk of QBE’s profit is generated from its investments in the bond market. Donald Trump’s victory points to increasing inflation in the US, which typically results in a weakening bond market, implying higher yields. For QBE this means improved yields on its investments and potentially larger returns for shareholders.

QBE, like most insurers, has a large hoard of working capital to invest in short-term securities. The higher the yield that QBE can generate on these short-term investments, the higher the profit and therefore dividends that QBE can pay.

What’s next? QBE has been in the doghouse for several years as management has failed to live up to its own revenue and profit promises. The most recent half-year results proved that this is still the case and saw the share price plunge.

Warren Buffett has often said that turnarounds seldom turn, and that will most likely be the case for QBE as well. Unless management can actually hit its own target in the next 12 to 18 months. If it can do that, then the company should be a great performer for investors and deliver a high dividend yield. However, it is a far from certain result at this point.


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Motley Fool contributor Andrew Mudie owns shares of QBE Insurance Group Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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