Every dog has its day and perennial underperformer QBE Insurance Group Ltd (ASX: QBE) looks poised to make it back into investors' good books if Morgan Stanley is on the money.
That should be a relief for shareholders with the share price of the insurer falling 0.8% to a three-week low of $9.71 this morning. This takes the stock's one-year loss to 21% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 9%.
But all that could change next month when the company hands in its first half results as Morgan Stanley thinks the market is underestimating the upside for the stock and is focusing too much on the downside risks.
There are three factors that are depressing the stock.
These include market worries that management will announce yet another disappointing set of results during the August reporting season, pressure on operating margins from its portfolio remediation, and potential negative changes to its reinsurance structure in 2019.
These risks are already in the price and QBE is likely to post a relatively clean result, according to Morgan Stanley.
"QBE is attractively priced vs. domestic and global peers and achieving better pricing in 2018 across Europe, North America and Australia, while actively de-risking the book," said the broker.
There are also tailwinds in the second half of the financial year that the market is overlooking. Morgan Stanley pointed to rising bond yields and the strengthening US dollar, both of which are positive for QBE's profits.
Morgan Stanley has an "overweight" recommendation on the stock with a price target of $12.00 a share.
But QBE isn't the only insurer with a positive outlook. The operating environment is looking brighter for the sector with the broker pointing out that broader commercial insurance lines repricing in Australia is "the strongest globally with momentum building"; while the pricing environment for personal and SME lines is also positive.
The broker's second favourite pick in the sector is Insurance Australia Group Ltd (ASX: IAG), while Suncorp Group Ltd (ASX: SUN) comes in a distant third after the stock's recent rally.
Morgan Stanley has an "overweight" rating on IAG but an "equal weight" call on Suncorp.
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