Why I think QBE Insurance Group Ltd is a buy

The S&P/ASX 200 Index (ASX: XJO) continued its march higher on Tuesday, buoyed by renewed optimism around the stimulatory policies of Donald Trump’s pro-business agenda.

Energy and mining giants BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Santos Ltd (ASX: STO) led the index higher as each benefitted from a resurgence in commodity prices.

The prospect of higher inflation also assisted banking stocks, with Commonwealth Bank of Australia (ASX: CBA) leading the big four higher. QBE Insurance Group Ltd (ASX: QBE), however, was one stock which bucked the trend.

Here’s why I think it’s worth looking into.

U.S. rates

It’s no secret that the Federal Reserve is seeking opportunities to lift interest rates after years of record-low inflation and unprecedented monetary policy. With Trump winning the election, the Federal Reserve may just get that opportunity when it holds its eighth and final FOMC meeting of the year on December 13-14.

Although Trump is yet to officially take the Oval office, global markets remain captivated by the possibility that a Republican government might shock the U.S. economy into rising inflation.

Whilst controlled inflation is good for sovereign wealth and economic prosperity, it spells disaster for bond prices. This is because investors seek higher returns to keep up with inflation.

This is why formerly coveted ‘bond proxies’  Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL) are under pressure of late – but you can read  more on that here.

QBE’s advantage

Risk-on behaviour invariably means certain asset classes will outperform others. With bond proxies Sydney Airport and Transurban being the perceived losers of higher interest rates, stocks like QBE should then be regarded as the winners.

I say this because unlike all ordinary growth stocks, QBE is leveraged to the U.S. economy. QBE reinvests most of its foreign earnings in U.S. government bonds and earns over a third of its group earnings from North America. As such, an increase in rates by the Federal Reserve should see bond yields rise, leaving QBE to reap higher returns on its earnings and investments.

Furthermore, increasing bond yields should translate to a stronger U.S. dollar, boding well for translational gains. Thus, when QBE reports its substantial earnings from its North Americas division, its bottom line should materially benefit when converted to Australian dollars.

Accordingly, it’s easy to see how a small rise in interest rates can materially boost returns for this global insurer.

Foolish takeaway

Investors must remember that QBE is a mature business which is unlikely to deliver blockbuster growth over the coming years. However, given its market-leading position as Australia’s largest insurer and dominance in US markets, it’s hard not to take note of the stock at current prices.

Although adverse natural disasters or a shock write-down could push its share price lower the prospect of rising interest rates in the U.S. provide a margin of error for a company that continues to churn out robust profits and pay a handy 4.6% yield.

Accordingly, investors looking to benefit from rising US interest rates should take note and consider buying QBE today.


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Motley Fool contributor Rachit Dudhwala owns shares of Fortescue Metals Group Limited, QBE Insurance Group Ltd., and Santos Limited. 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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