The recent rise in the ASX may have come as a welcome relief for many investors. After all, the crash in August and September had wiped almost 14% off the value of the index and caused considerable uncertainty among Aussie investors.
However, even after making up some of those losses during October, the ASX remains in a precarious position. The problems facing the economy have not yet gone away and, as such, the 7% rise in the ASX since the start of October may not persist over the medium term.
As such, buying high-yield, defensive stocks makes sense and two excellent examples are QBE Insurance Group Ltd (ASX: QBE) and Insurance Australia Group Ltd (ASX: IAG). They have betas of 0.56 and 0.59 respectively and this means that their shares should in theory be less volatile than the wider index.
Furthermore, the two stocks offer ASX-beating forward yields of 5.4% (QBE) and 5.3% (IAG). Furthermore, if the ASX falls then a steady income stream can allow investors to take advantage of depressed prices through having cash available to make purchases.
However, even if the ASX does continue its upward trajectory, both QBE and IAG could beat it. In QBE's case, it is pursuing a strategy which is transforming its bottom line, with numerous non-core businesses being sold-off to make way for a core company which benefits from greater efficiencies and which is due to deliver growing profitability in the coming years. For example, QBE's bottom line is due to rise by 31% in the current year, followed by growth of 20% next year.
Despite this, QBE trades on the same price to book value (P/B) ratio as the ASX of 1.3 and, while its track record is poor and includes a loss-making period, the 'new' QBE is a different beast which seems to be gaining traction among investors judging by its 20% share price rise in the last year.
Likewise, IAG has upward rerating potential, with its shares trading at a discount to the ASX and the wider insurance sector. For example, IAG has a price to earnings (P/E) ratio of 14.3 versus 15.8 for the wider index and 16 for the wider sector.
Looking ahead, IAG is embarking on an ambitious transformation programme which includes integrating the acquired Wesfarmers business as well as generating efficiencies such as a $230m pretax synergy and benefit run rate in the 2016 financial year. And, with IAG targeting continued growth in Asia where its contribution to group earnings increased to $21m last year, as well as plans for a major digitisation strategy, it looks set to become a leaner and more profitable business over the medium term. This is likely to aid its shares in recovering their losses of 7% in the last year.
