Interest rate hikes to become a positive catalyst in 2010: With signs of a
bottom developing in global GDP, a strong likelihood of 8% GDP growth in
China in FY09 and an increase in asset prices in the past nine months, we
believe the probability of a monetary policy response by the PBOC has
increased. In this regard, our economists forecast that PBOC will hike rates
by 198 bp in 2010. We expect this to become a positive catalyst for the PRC
insurers.
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Conventional products underpin importance of interest rates: In our
view, interest rates are a critical macro driver for the PRC life insurers. Given
the industry’s focus on conventional products, profit and valuation tend to
correlate positively with bond yields. At the same time, positive momentum
in equity and property prices (a pre-cursor to rate hikes) would support EV
growth and recovery in earnings.
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CTIH and China Life preferred: While the sector is no longer cheap, we
see upside risk to growth forecasts, supportive macro trends (i.e., interest
rate expectations) and regulatory reforms as key supports for the sector.
Within a positive overall view, we believe CTIH offers superior upside,
underpinned by an exceptional EV growth outlook. Among the large caps,
China Life is favoured over Ping An in the short-medium term. Despite
trading at a P/EV premium, our preference for China Life reflects the
absence of overhang and potential for strategic investment to act as a
positive catalyst.