Higher interest rates have a talent for making themselves unpopular. Mortgage payments get uncomfortable, business loans cost more, and stocks suddenly have to compete with a perfectly respectable savings account. Investors can be forgiven for wanting something in their portfolios that doesn’t immediately sulk when borrowing costs rise.
Canadian rate expectations have swung sharply. An October 20 market report put the probability of an October Bank of Canada increase near 83%, up from roughly 30% before the weekend.
For investors, the sensible response is to understand how a business earns its money. A higher policy rate can help one part of a company while causing trouble somewhere else. Life insurance is a good example of that slightly unhinged relationship.
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Where higher yields help
Insurers collect premiums and invest money to meet future claims. As bonds mature and fresh premiums arrive, higher market yields can improve the income available on replacement investments. That benefit develops over time. Nobody gets to swap an entire bond portfolio for higher-paying securities overnight without consequences.
Existing bonds can lose market value when yields rise. Liability values also change, and hedging complicates the accounting. A weaker economy can affect policy sales, credit quality, and customers’ willingness to keep paying premiums. Buying an insurer simply because rates might rise skips quite a lot of the homework.
That makes Manulife Financial (TSX: MFC) interesting for more than its interest-rate exposure. Its Canadian listing gives investors access to insurance and wealth operations spread across several markets, including a substantial Asian business.
Asia brings its own growth
Manulife reported second-quarter core earnings per share (EPS) of $1.09, up 16% on a constant-currency basis. Asian core earnings rose 21% on the same basis. These are adjusted measures, so investors should keep an eye on reported results as well. Still, the operating growth gives the investment case something more substantial than a bet on the next central-bank meeting.
At a recent share price of $62.26, the shares cost about 14.3 times earnings. The valuation looks reasonable enough to investigate, but isn’t a screaming bargain. Investors buying Canadian stocks should compare that price with growth they believe can continue through a less cooperative economy.
Keep the rate bet small
The biggest danger is paying for several favourable developments at once. Asian sales could slow, markets could weaken, or credit losses could climb. Higher reinvestment yields wouldn’t necessarily offset all of that. Insurance also comes with long-dated obligations that can produce unpleasant surprises long after a policy was first sold.
For a dividend portfolio, I’d treat Manulife as a financial holding with multiple earnings sources, not as protection against every rate increase. It belongs alongside businesses with different risks, especially for investors already heavily exposed to Canadian banks.
Bottom line
A smaller initial purchase would leave room to add if the shares weaken without a corresponding deterioration in the business. That approach suits a company whose reported results can move with markets even while underlying sales improve. I’d avoid shifting a large utility or cash position into Manulife solely to chase higher rates. Changing the type of risk is a portfolio decision, not a free upgrade.
My next checkpoint would be continued growth in Asian earnings and the quality of the investments supporting future claims. If those hold up, Manulife can keep improving even after the excitement around October’s rate decision has faded. That would be a much better outcome than getting one policy announcement right.
