Today I am looking at the investment potential of two London laggards.
Insurer struck by forex woes
Life insurance leviathan Old Mutual (LSE: OML) has seen its share price take a colossal whack in recent days. The business has rattled 10% lower during Friday trading alone, taking total losses during the past fortnight to an eye-watering 26%!
Sour investor sentiment has worsened more recently thanks to chronic weakness in the South African rand, the currency slumping to fresh record lows against the US dollar in end-of-week trading. This heavy weakness has been prompted by the dismissal of South Africa’s finance minister Nhlanhla Nene on Wednesday, exacerbating concerns over the country’s economic outlook.
This is, of course, a massive concern for Old Mutual, as South Africa is by some distance the firm’s single largest market. And further turbulence could be in store as President Jacob Zuma’s administration struggles against a backcloth of rising inflation and cooling GDP growth thanks to tanking commodity prices.
Profits in South Africa advanced 14% between January and July, and while intensifying currency woes could dent returns further out, Old Mutual’s ability to keep delivering double-digit growth despite challenging conditions bodes well for future returns. On top of this, profits across the rest of Africa kicked 31% higher during the first half.
Falling resources prices are a problem for the entire continent — the oil-dependent economy of Nigeria has also been battered by falling ‘black gold’ prices during the past year — but Old Mutual continues to benefit from an environment of low insurance products in Africa, with sales boosted by steady product evolution and improving digitalisation.
As a consequence the City expects Old Mutual to punch earnings growth of 10% in 2015 and 4% in 2016. And thanks to recent share price weakness, these figures leave the insurer dealing on bargain-basement P/E ratings of 10.1 times and 9.7 times for these years. With dividend yields also clocking in at 4.7% for 2015 and 5% for 2016, I reckon Old Mutual is a great stock pick at these prices.
Bank poised to blast higher
Like Old Mutual, banking colossus Santander (LSE: BNC) is also battling the effect of falling currencies in developing markets. Indeed, the company saw profits from Brazil — a region from which Santander sources a fifth of total profits — dip 11% between July and September due to enduring weakness in the real.
Shares in Santander have dipped again in end-of-week business thanks to patchy investor sentiment, leaving the bank dealing at levels not seen since mid-2012. But I believe this presents a brilliant buying opportunity as, like Old Mutual, I expect rising income levels in emerging regions, combined with Santander’s suite of market-leading products, to deliver stunning returns in the years ahead.
In the more immediate term, Santander’s exceptional progress in established territories like the UK is anticipated to drive earnings 3% higher this year and 5% in 2016. Consequently the business sports P/E ratings of just 9.3 times for 2015 and 8.9 times for next year.
And a robust yield of 4.3% for this year, based on a planned dividend of 20 euro cents per share, seals the investment case in my opinion.