This is the BEST ASX 200 stock to buy now that El Nino is here: Wilsons

What's the weather got to do with stocks? Wilsons' Greg Burke explains.

| More on:
A farmer stands in a field of dry grass with hands on hips and looking to the sky for rain, waiting for the drought to end.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're on the east coast of Australia, you might remember 2022 was the year when it just wouldn't stop raining.

The backyard was permanently soaked and parts of Victoria, NSW and Queensland even experienced devastating floods.

That was all thanks to the oceanic phenomenon of La Nina.

Now, in 2023, meteorologists have declared that her counterpart El Nino has arrived.

That will mean that eastern Australia is more likely to experience drier-than-normal conditions for the foreseeable future.

But you're reading The Motley Fool, so you're wondering what weather patterns have to do with S&P/ASX 200 Index (ASX: XJO) shares.

Well, believe it or not, the team at Wilsons Advisory reckons they've found the perfect stock to buy for El Nino.

The sector that's sitting pretty in 2023

Wilsons analyst Greg Burke, in a memo to clients, argued that conditions have never been better for the insurance industry.

As an essential service, insurance providers have been able to raise premiums this year in line with inflation without worrying too much about losing customers.

And the current anxiety in the economy is also a boon.

"An improved outlook for future investment returns given recent strength in bond yields," said Burke.

"Insurance should be relatively resilient through a consumer slowdown."

Finally, after a shocking 2022 when claims from water-related damage were coming in thick and fast, the sector is welcoming dry conditions associated with El Nino.

"The prospect of claims cost pressures [are] easing after a tough period for natural perils."

Which ASX shares are the best bet in insurance?

Among the ASX 200 insurers, Burke's pick is Insurance Australia Group Ltd (ASX: IAG), which Wilsons already holds in its focus portfolio.

"IAG is poised to deliver the strongest earnings per share (EPS) growth over the next 3 to 5 years out of the ASX listed general insurers, with risks skewed to the upside (vs consensus), in our view."

And it is flush with money to return to shareholders.

"IAG is the only ASX-listed general insurer currently conducting capital management activities — it is currently ~35% of the way through its $350 million on-market buyback," Burke said.

"There is scope for further capital management over the medium term, given IAG's strong balance sheet, improving profitability, and considering the likelihood (in our view) of further Business Interruption (BI) provision releases (provision is currently ~$400 million), following favourable court rulings."

So far this year the IAG share price has risen more than 22%.

However, with the stock still 34% lower than its pre-COVID peak, Burke says the stock has an "undemanding valuation".

"IAG's forward price to book ratio, at ~1.9x, sits below its 10-year average of ~2.1x, which we view as undemanding considering the strong cyclical tailwinds and IAG's medium-term earnings trajectory."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Woman calculating dividends on calculator and working on a laptop.
Dividend Investing

Buy NAB and these ASX 200 dividend stocks

Analysts are saying good things about these income options.

Read more »

ETF written on cubes sitting on piles of coins.

The rise of dividend ETFs in Australia: A new era of investment

Dividend ETFs can be great, but make sure you watch out for these key indicators.

Read more »

Smiling woman holding Australian dollar notes in each hand, symbolising dividends.

2 ASX dividend stocks I'll be buying hand over fist in 2024

These two shares are on the top of my 2024 wish list.

Read more »

A senior investor wearing glasses sits at his desk and works on his ASX shares portfolio on his laptop2
Dividend Investing

3 ASX All Ords shares with ex-dividend dates next week

You'll need to get a wriggle on if you want to receive these dividends.

Read more »

three children wearing superhero costumes, complete with masks, pose with hands on hips wearing capes and sneakers on a running track.
Investing Strategies

The 3 best deals on the ASX today

Grab these stocks while they're cheap before interest rates stop rising.

Read more »

Woman holding $50 notes and smiling.
Dividend Investing

3 ASX dividend stocks to solve your income needs

These dividend shares have been given the thumbs up by analysts.  

Read more »

a man with a wide, eager smile on his face holds up three fingers.
Small Cap Shares

3 small-cap ASX shares to buy in December

These small caps have been given the thumbs up by analysts.

Read more »

A couple calculate their budget and finances at home using laptop and calculator.
Dividend Investing

Passive income: How much should you invest to earn $5,000 in annual ASX dividends

When it comes to passive income, I prefer ASX 200 shares with a reliable track record of making regular, fully…

Read more »