As markets brace for a period of potential volatility amid the upcoming US election, brokers say several ASX-listed financial stocks could be primed for gains.
They might be onto something too. The S&P/ASX 200 Financials Index (ASX: XFJ) has rallied nearly 26% this year to date, versus an 8% gain for the benchmark S&P/ASX 200 Index (ASX: XJO).
Several financial companies have led the way.
Among them, Insurance Australia Group Ltd (ASX: IAG), Medibank Private Ltd (ASX: MPL), and QBE Insurance Group Ltd (ASX: QBE) stand out in analyst circles, each catching buy ratings in recent weeks.
Let's see what the experts have to say.
Financial stocks catching broker attention
Financial stocks have rallied in 2024 as the macroeconomic environment has created a number of sector-specific catalysts.
These include higher interest income and higher gross written premium (GWP), both downstream results of high inflation.
IAG has had a robust 2024 so far, benefiting from several of these industry tailwinds. Shares are up 32% this year to date.
Higher insurance premiums and elevated interest rates have boosted earnings from its investment portfolios.
The stock received a further boost after Firetrail Investments noted that a class action related to business interruption claims from COVID-19 was 'declassified'.
This could see a significant portion of IAG's $380 million provision assigned to the case and returned to shareholders. Think dividends and/or buybacks.
According to Motley Fool writer Tristan Harrison, the fund manager also highlighted IAG's double-digit premium growth across motor and home insurance in FY23 and FY24.
It says the financial stock is well-positioned for "sustained earnings growth" moving forward.
How do QBE and Medibank stack up?
QBE Insurance has also caught the eye of analysts in recent weeks thanks to its solid performance in the first half of FY24.
Morgans is optimistic about QBE's North American business and has maintained its buy rating on the financial stock with a price target of $18.73.
QBE delivered a return on equity (ROE) of 17% during the first half, up ten percentage points on the prior corresponding period.
Although QBE slightly lowered its revenue guidance for 2024, given the ROE growth and earnings projections, Morgans sees the company "as too cheap".
Meanwhile, analysts at Ord Minnett rate Medibank a buy with a $4.25 price objective.
It says the financial stock is appealing to income-focused investors.
The broker also forecasts fully franked dividends of 17.5 cents per share in FY25, translating to a yield of 4.7% at the current share price of $3.69.
Ord Minnett says Medibank is "a defensive stock that investors should own".
Foolish takeaway
These ASX financial stocks each present different strengths according to top brokers. Despite the looming US election, for investors seeking exposure to the sector, they might be worth a look.
IAG is up 32% in the past year, whereas Medibank and QBE are up 4% and 11% respectively.
