Fed rate hike jitters have once again gripped the capital markets following the surprisingly hawkish tone adopted by Chairwoman Janet Yellen and Vice Chair Stanley Fischer during last week’s Jackson Hole symposium. Moreover, in the days since Jackson Hole, the capital markets have begun to price in a one-in-three chance of a September hike (up from June’s near-zero levels), while the U.S. dollar has rallied sharply against its international counterparts.
For the commodity-heavy TSX, tighter U.S. monetary policy means lower commodity prices and, of course, an increase in the cost of debt borne by some of Canada’s most leveraged producers. Conversely, Canadian financials are expected to fare much better in the changing global macroeconomic conditions with higher U.S. interest rates expected to increase debt yields and the margins received on lending.
Manulife’s discounted valuation
Manulife’s most recent Q2 2016 core EPS came in at .40 (down 8% year over year), well below consensus estimates of .46. Moreover, adverse U.S. policy holder experience, predominantly from the long-term care sector, led to an 11% year-over-year decrease in U.S. core earnings, which, combined with management’s forecast of a pending $500 million actuarial charge in Q3 2016, compounded to a less than stellar report.
Unsurprisingly, Manulife was sold off by the market and currently trades well below its all-time highs made in June 2015. This noticeable drop in share value has contracted Manulife’s valuation to levels not seen since 2009 with a price-to-book value of just 0.90 times–below the sector median of 1.3 times among the Canadian Lifecos.
Discount not pricing in growth prospects
Manulife’s Asian division continue to be the company’s shining star. Sector core earnings were US$266 million in Q2 2016 compared to US$230 million in Q2 2015–an increase of 16%.
Furthermore, Manulife enjoyed a record quarter for annualized premium sales in Asia at US$627 million–34% higher than in Q2 2015, while its partnership with DBS continue to pay off as all four Asian segments recorded strong sales growth from the prior quarter. Wealth and Asset Management divisions across Canada and the U.S. also continued to perform strongly with a 7% year-over-year increase and 5% year-over-year increase, respectively.
Strong yield adds to bull case
Manulife stands to benefits from higher interest rates and subsequently a higher U.S. dollar as net income from foreign operations are translated into Canadian dollars. Furthermore, according to a recent research report by Barclays Capital, Manulife exhibits a roughly $100 million parallel movement on its earnings from a +/- 50 basis point change in interest rates (Q4 2015 figures), making the company an ideal way to seek exposure to potential a rate hike.
Finally, for income-oriented investors, Manulife pays out a hefty 4.04% yield, which has been steadily increasing over the last three years, even in the face of low energy prices and interest rates.