“Always on the lookout for breakouts from chart bases, I have been following the progress of the Dutch insurer Aegon. The chart looks to be at the point of an upside breakout. What do you think about this chart pattern?”
Eoin Treacy's view Thank you for highlighting Aegon, and
the insurance sector more generally. Insurance companies collapsed along with
the banking sector in 2008 but without the overhang of delinquent loans, the
sector is recovering somewhat quicker. I agree that Aegon's chart pattern has
base formation characteristics and the global insurance sector offers an interesting
example of commonality.
Let's begin with the Netherlands where Aegon (P/E 10.98, DY 3.77%) is the 2nd largest company insurance provider. Both Aegon and ING have rallied over the last couple of the months to test previous areas of resistance. While somewhat overbought in the very short term, sustained move below their respective trend means would be required to question medium-term upside potential.
On a European level, the Dow Jones Euro Stoxx Insurance Index has held a progression of higher reaction lows since 2012 and broke out of its base last week. A sustained move below 165 would be required to question medium-term recovery potential. The Index is being led higher by some of the larger companies such as Allianz, AXA and Muenchener Re (P/E 7.77 DY 4.77%). The latter stands out for special mention. It found support two weeks ago in the region of the 2007 peak and the 200-day MA. A sustained move below €135 would be required to question medium-term upside potential.
On a fundamental valuation level, Europe is cheaper than the US. Its performance has generally lagged and therefore there is scope for a catch up move. Berkshire Hathaway (P/E 21.4) represents the largest weighting in the S&P500 Insurance sector. While it continues to outperform, the share is becoming progressively more overextended. Prudential Financial (P/E 11.3, DY 2.03%) is also worthy of mention. It completed a three-year range in May and continues to extend the breakout. AIG (P/E 12.9) would have gone bust were it not the intervention of the Fed, but the share now appears to be on a recovery trajectory, albeit from an historically low level. It has a held a progression of higher reaction lows since late 2011 and a sustained move below $40 would be required to question potential for additional medium-term upside.
AIG divested its high growth Asian unit in 2009 and this company is now listed in Hong Kong. AIA Group (P/E18.3, DY 1.03%) remains in a reasonably consistent uptrend and found support in the region of the 200-day MA at the end of June. A sustained move below HK$40 would be required to begin to question medium-term upside potential.
Taking all of the above into consideration. Aegon is not a leader but it does have catch-up potential and its chart pattern is constructive. Therefore we can conclude that the balance of probabilities is stacked in favour of a sustained breakout. The share would be best bought closer to its trend mean.