Companies in the financials sector continue to keep the broader S&P/ASX 200 (ASX: XJO) afloat despite the continued selling of tech stocks that have previously been the beneficiaries over the last 12 months.
QBE Insurance Group Ltd (ASX: QBE) and Suncorp Group Ltd (ASX: SUN) have been some of the better performers recently, up 22% and 5% respectively since the start of February.
You’ve probably heard by now how long-term bond yields are increasing and the effect this is having on many growth stocks with lofty valuations.
Companies in the financials sector; such as banks, insurance companies and brokerage firms; tend to move in the opposite direction and stand to benefit from a rise in interest rates as they’re usually able to increase their profit margins.
As you can see from the comparison below, QBE has been moving almost perfectly inversely to Xero Limited (ASX: XRO), an ASX growth share, over the past month.
Source: Google Finance – QBE vs XRO share price chart
Interest rate tailwind
An insurance company generates revenue by earning a margin, or the difference between, what it takes in from premiums customers pay and what it pays back to them as claims. It will also invest the money or ‘float’ it has available.
In a higher interest rate environment, earning a higher margin is suddenly far more achievable which will have a positive impact on its profitability.
Banks also stand to be beneficiaries of rising interest rates, which signal a strengthening economy. In a better performing economy, borrowers are more likely to be able to make loan payments, resulting in the bank having fewer non-performing assets.
Additionally, the net interest margin a bank can earn is able to expand as it can generate higher amounts of revenue from income-generating assets such as mortgages.
Are QBE and Suncorp shares a buy?
Given the cyclical nature of companies in the financials sector and their relation to interest rate movements, part of your buying decision would consider your prediction on the outlook for interest rates.
QBE and Suncorp shares might perform well if investors continue to rotate out of growth stocks, but it’s not an area that I’d usually invest in myself. There appears to be a lot of moving parts in businesses such as these with insurers facing additional pressure from often tough government regulation.
If you’re looking for ASX dividend share ideas, you can read about them here: These could be 2 of the best dividend-paying stocks on the ASX.
If growth shares are more your style, click here to read: 2 ASX tech shares I’m watching in March.
