Why Prudential shares offer 40% upside

After losing a fifth of its value in 2022 so far, this insurance giant is cheap, according to one City expert. Another reveals where they’re putting their money for a second-half recovery. 

Prudential (LSE:PRU) shares offer “tremendous long-term value” as China’s economy begins to reopen, a leading City bank declared today.

Shares in the FTSE 100 insurer have been hit in recent months by Covid restrictions affecting Hong Kong and major Chinese cities, as well as the Pru’s own failure to appoint a new Asia-based chief executive to overlap the retirement of long-time boss Mike Wells.

But news-flow is improving after the recent announcement that Anil Wadhwani will take the helm from February and as authorities in China begin to relax pandemic curbs.

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While a re-opening of the Hong Kong border is still a long way off, Deutsche Bank sees reasons for optimism after a gruelling few months for Pru investors.

The popular stock topped 1,500p in September only to fall as far as 881p by mid-May. There’s been a recovery over the 1,000p threshold since then, but a 17% year-to-date decline still compares with an 8% fall for the Hang Seng index and a 3% rise for the FTSE All-Share.

On 10 times 2023 earnings, Deutsche Bank points out that Prudential trades at a 7% premium over European insurers even though its potential growth rate is as much as two times greater.

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The shares also have a 40% upside to catch up with rival AIA's earnings multiple, compared with a typical range in recent years of 10%-25%.

Highlighting a “buy” recommendation and 1,475p target price, analyst Oliver Steel said: “News-flow does appear to be improving once again and the shares at current levels offer tremendous long-term value.”

The last piece of the Pru’s restructuring jigsaw was filled in the autumn with the demerger of US-based Jackson National Life, having already spun off its UK unit in the form of M&G (LSE:MNG).

But its plan to target the high-growth savings and investment markets of Asia and Africa have been hampered by the closure of the Hong Kong-China border for more than 18 months.

In Prudential’s annual results, Hong Kong sales fell 27% as mainland China customers were prevented from buying insurance products in the territory. Excluding Hong Kong, 2021 sales grew by 16% thanks to demand in mainland China, India, Malaysia, the Philippines, Singapore and Thailand.

But these figures were before the tightening of Covid restrictions in affluent cities such as Shenzhen, home to tech and manufacturing firms including Foxconn and Huawei.

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In recent days, however, there’s been better news as high-frequency data suggests activity is already resuming at pace. In Shanghai, for example, there were 2.4 million rides on the subway last Saturday as the city emerged from the two-month lockdown, well above the 30,000 level a week ago. In Beijing, traffic bans have been lifted across the capital.

The offshore MSCI China index has rallied 6.7% since authorities declared the virus outbreak was under control and moved to loosen some mobility curbs.

However, UBS Global Wealth Management expects other asset classes to benefit from China’s economic reopening and expected recovery.

It argues that copper markets have yet to fully price in the positive backdrop and said it wouldn’t take much, whether from the demand or supply side, for prices to rise.

UBS also expects near-term oil prices to be supported by China’s rebound and the northern hemisphere summer season, meaning risk-taking investors should add long positions in longer-dated oil contracts. It also maintains a global sector preference for energy equities.

Chief investment officer Mark Haefele said: “We advise investors to seek exposure to assets most likely to benefit from China’s economic recovery in the second half of the year. Aside from Chinese equities, we like oil, copper, and commodity-linked currencies.”