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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Premium at Aviva to re-rate higher
A glance at the above chart of the FTSE 100 shows it has been a strong week for equities as tensions ease that politicians on both sides of the Atlantic are nearing a solution to the sovereign debt issues.
Banking stocks led a sell-off in risk assets at the start of the week following the result of stress tests on European banks that failed to consider the potential impact of a sovereign default on the sector. Growing optimism that Eurozone leaders would come up with a second bail-out package for Greece and some solution to contain the contagion risk has however helped restore confidence in the financial sector.
The emergency summit of Eurozone leaders on Thursday pledged a second bailout of Greece and gave their financial rescue fund broader powers to try to prevent market instability spreading across the region, sending equities sharply higher. An extra €109 billion of government money and €50 billion from the private sector has been pledged, which is estimated to cover Greece’s funding needs until 2020.
Concerns regarding the US debt ceiling also eased after President Barrack Obama announced that a significant step had been taken in negotiations over the debt ceiling, which should result in the world’s largest economy maintaining its triple A credit rating.
Encouraging US earnings reports also underpinned a selective return of risk appetite after Bellwether’s IBM, Apple, Coca-Cola and Morgan Stanley unveiled robust quarterly earnings figures that beat analyst’s expectations.
Despite the sovereign debt cloud, economic data released this week has been positive. US housing starts rose 14.6% in June to 629,000 well above the 575,000 expected and its highest for five months. New building permits also rose 2.5% in June, defying the negative figure economists had predicted, providing some reassurance that the housing sector could be improving.
Technical analysis captures the volatile trading experienced for much of 2011, with the index bouncing between either end of the trading range between 5600 and 6100. Resistance is seen at 6000 and 6105, with support seen at 5800 and 5640. The oscillators have also moved higher out of oversold territory, suggesting a new trend is underway.
In conclusion, for the first time since the Greek debt crisis erupted early last year it suggests that Europe is taking a comprehensive, longer term approach to the problem, rather than simply lending Greece more money with an extortionate interest rate to avoid disaster in the near term.
The agreement signaled an important landmark in the Eurozone debt crisis and by enhancing the powers of the European Financial Stability Facility it should contain the contagion risk in the region. A positive decision from the US will also help answer the fears of the market and should generate a stable footing that will enable investors to re-focus on the economic recovery.
Life insurance companies have been amongst the worst performing sectors this month as concerns over the financial sector and potential exposure to the European sovereign debt crisis deterred investors.
Aviva (LON:AV.) is the UK’s largest insurance company, formed by the merger of CGU and Norwich Union. Around half of sales come from the US with other major interests in France, Holland, Poland, Russia and Turkey.
A first quarter update on the 17th May 2011 affirmed the group is expected to “thrive” this year assisted by a strong performance of its general insurance business. Life insurance sales fell as expected due in part to smaller contributions from Europe and the US, but the groups overall net asset value on a MCEV basis has grown over 6% to 576p. Unlike many other insurers, the group had no exposure to the catastrophic environmental events in Australia, Japan and New Zealand in the first quarter of the year.
The benefits of its restructuring announced last November are starting to be felt after management announced that they plan to trim less profitable operations and focus on its core competences in an effort to boost overall group profitability.
Aviva recently announced the sale of motor insurer RAC for a better than expected price of £1 billion, representing a healthy 17x earnings. This compares well to the £1.1 billion paid for the company in 2005 when you consider the dividends received and that it has already sold parts of the business for over £500 million. It also makes the lowly rating for the remainder of Aviva’s business look comparatively cheap.
Other divestments are also expected and will result in a much stronger balance sheet, which should support the share price and drive a re-rating from the current undemanding 5.8x earnings. Shareholders will also benefit from a 6.8% dividend yield, which covered more than 2.5 times by earnings, looks relatively safe.
As can be seen from the above chart, Aviva’s shares have fallen almost 20% from their highs earlier this year and have found support from the historical level of 394p. The oscillators are starting to lift out of oversold territory and emitting a buy-signal based on increased momentum and the start of a new trend.
Based on the earlier analysis of the FTSE 100 combined with the strong fundamental and technical analysis discussed for Aviva, I believe the shares offer strong value at current levels for both short and longer-term shareholders.
At the time of writing the share price is 403.1p with resistance seen at 427.2p, 439.5p and 468p, with a stop loss marginally below support at 386.5p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Aviva, but client accounts may. The material in this report has come from Simply Charts and Aviva’s corporate website.
