Shares in Suncorp Group Ltd (ASX: SUN) have started the new year well and are up 6% since January 1.
Suncorp shares have opened Thursday's session at $11.73 today after pre-market activity, having climbed from a low of $10.65 back in December. However, the bank still has some headroom before touching 52-week highs of $12.94 back in October last year.
But the macro-narrative is shifting in 2022 to one of inflation, interest rates, and how this impulse will direct fund flows in financial markets.
The market is pricing in 3 to 4 rate hikes from the US Fed in 2022 according to market data, spurred on by language from US Fed chair Jerome Powell and minutes from the most recent Federal Open Market Committee (FOMC) meeting.
As such, the market looks as if it's pricing in the impact of these rate hikes, and there's been a corresponding rotation out of tech and high-growth into sectors that have the highest correlation to US Treasury yields this year.
The top segment in this regard according to research from JP Morgan is the financials sector, which, unsurprisingly, has seen the largest fund flows since we rolled into 2022.
For instance, the Financial Select Sector SPDR Fund (NYSEARCA: XLF) recorded the highest net inflows of any listed product last week, reaching a total of $2.34 billion.
Moreover, the S&P/ASX 200 Financials Index (XFJ) has climbed 1.5% this year to date after rallying 3% in the past month.
So investors are starting to park their hard earned capital into the more defensible pockets of the market. How does this bode in for the Suncorp share price? Here's what Morgan Stanley and JP Morgan had to say in recent notes to investors.
What's the chatter from analysts?
The team at JP Morgan are neutral on Suncorp, although reckon that the bank could benefit from macroeconomic factors currently impacting the industry, such as reduced motor claims from COVID-19 lockdowns.
Aside from that, the broker says Suncorp's margins are likely to benefit in 3 to 4 core areas going forward. It reckons Suncorp will see margin expansion in home personal and commercial lines, alongside incremental benefits from perils allowances and expenses.
Given the talk on industry-wide pressures to net interest margins (NIMs) in 2022 for the ASX banking sector, JP Morgan notes this is a positive to Suncorp's investment debate.
However, it views these positive trends alongside "some margin degradation in CTP [compulsory third party insurance]".
The firm is also cautious on Suncorp's Australian personal lines business, and questions if the bank's cost-to-income targets are a little too optimistic.
Although it remains neutral on Suncorp, it values the bank at $13.30 per share, after applying a risk adjustment to its discounted cash flow (DCF) valuation of $14.32 and franking credits at 70%.
It applies this discount to "reflect adverse events such as heavy rains and flooding in NSW that pose some downside risk and may cause the market some concerns about [Suncorp's] exposure".
Meanwhile, the team at Morgan Stanley are also neutral on Suncorp shares. However, the investment bank just completed its analysis of 2021 home and motor new business pricing for Q4 2021, noting Suncorp's more competitive pricing versus competitors.
Yet, Morgan Stanley also reckons the savings pool from Suncorp's motor savings may have largely dried up, and as such, it sees "margin risks from higher claims and input costs, unless pricing improves or Suncorp achieves larger cost savings".
It values the company at $11.90 per share and joins the likes of Morgans and Barclay Pearce Capital in its neutral stance.
Consensus is still bullish
Despite the neutral sentiment, Macquarie, Jarden and Credit Suisse still tip the Suncorp share price to outperform in 2022.
In fact, the overall sentiment appears to be bullish, according to a list of analysts provided by Bloomberg Intelligence. For instance, 61.8% of coverage has it as a buy, whereas the other 38.5% has it as a hold.
There are no services recommending that their clients sell Suncorp in the list of analysts utilised for this report.
As such, the group has a consensus price target of $13.05.
In the past 12 months, the Suncorp share price has climbed 9% after rallying 8% in the last month.
