Rock bottom interest rates, changes to annuity regulations and growing unease over the health of developed world economies have dented investor confidence in blue chip insurer Prudential (LSE: PRU) over the past year. But, despite these challenges, the FTSE 100 stalwart still has a place at the top of my watch list. Why?
A clear trend
The primary reason is Prudential’s long term growth potential. While other UK-listed insurers are focused on highly profitable, but low growth, developed markets, Prudential brings in roughly 1/3 of its profits from increasingly wealthy and sophisticated consumers in Asia. As consumers in countries from Cambodia to China and Malaysia bring home bigger pay cheques, they turn to Prudential for their insurance needs.
This trend is clear in the whopping 19% year-on-year rise in Asia long term operating profits recorded in the first half of 2016. With the centre of the world economy creeping further and further towards Asia each year, Prudential is set to benefit immensely in the coming decades from exposure to this fast growing region.
Hard to beat
However, it’s not as if Prudential’s historical core markets, the UK and US aren’t pulling their weight. Operations in the two countries recorded 6% and 8% year-on-growth, respectively, in operating profits in the first half of the year, as strong insurance sales more than compensated for volatile markets taking their toll on asset management performance.
There is no escaping the fact that the insurance business is a cyclical one, but Prudential is more insulated from economic downturns than competitors thanks to a very healthy balance sheet and geographic diversification. Its shares aren’t a bargain at 13.5 times forward earnings, but for a high quality company with stunning long term growth potential, Prudential is hard to beat.
Optimism for the future
One company that can more than match Prudential’s growth potential is luxury retailer Burberry (LSE: BRBY). Like Prudential, it is Burberry’s high exposure to Asia that gives me optimism for the company’s future. In 2015 just shy of 40% of Burberry’s sales came from Asia, which is far and away its largest market.
Now, it does have to be said that this exposure has also been a drag on performance in the short term. Last year underlying revenue from the region was down 2% year-on-year and weakness has carried over into 2016, with comparable sales declining by low single digits throughout the first half.
Why aren’t I more worried by this? Mainly because falling sales are due to a corruption crackdown in China that has dented wealthy consumers’ drive to buy £1,000 hand bags, lest they end up on anti-graft officials’ radar. This has hit all luxury retailers fairly equally, showing that Burberry’s scarves and handbags are still highly sought after. That means sales should rebound strongly once this crackdown inevitably ends.
Incredible pricing power
Burberry’s board has also taken several positive steps to cope with this Asian downturn, including implanting an ambitious cost-cutting drive that should help drive operating margins back to their normal 16%-17% range, bringing in a new CEO to allow former CEO Christopher Bailey to focus solely on his creative functions, and embracing fast fashion techniques that see clothes jump straight from the London Fashion Week catwalk to the website.
A strong balance sheet with net cash of £529, incredible pricing power and high long term growth potential put Burberry shares high on my watch list, despite short term trials and tribulations.