The Magellan Financial Group Ltd (ASX: MFG) share price is up 55% since the start of 2019. There are many causes behind the share price acceleration such as the recent performance of Magellan’s funds, current condition of the domestic economy and the upcoming federal election.
The biggest contributor to Magellan’s recent share price increase was the results posted in its half-yearly report. Total revenue saw an increase in 40.8% with NPAT up by 224.6%. This resulted in an increase in EPS from 31 cents at December 2017, to 98.2 cents 12 months later. As the majority of Magellan’s revenue is in the form of management fees from the client’s funds, these results can show a direct correlation to the outperformance of the fund managers at Magellan.
Many investors would understand that the current domestic economy is not in good condition. Australia, a country that is heavily dependent on the housing market, is bound to have issues when housing prices in both Sydney and Melbourne continue to fall. Many analysts have projected that the housing bear market in Sydney and Melbourne looks to continue its downtrend throughout this year and possibly into the 2020s.
Weakness in the domestic economy will directly affect equity markets, particularly the financial industry. Despite Magellan being part of this industry, the majority of its investments and revenue streams are derived from international holdings. This allows Magellan to be hedged against the domestic economy which is something that investors should be taking advantage of. Furthermore, with the 2019 federal election coming up, the financial industry can further be affected if ALP wins. Once again, investors who own Magellan in their portfolio will be less concerned about this result.
An advantage about Magellan which investors may not realise is that Magellan incurs a lower tax rate than other domestic companies. Compared to the current company tax rate of 30%, Magellan is only required to pay 22.6%. This is because Magellan is considered as an Offshore Banking Unit (OBU) meaning that assessable offshore income after costs is taxed at 10% instead.
With Magellan’s current management team and its recent performance, I think Magellan’s share price presents a good buying opportunity to hedge against current macroeconomic issues.
Issues such as a slowing domestic economy and uncertainty in politics lead to an increased risk in public markets which could impact the financial industry. However, Magellan appears to be more resilient to these issues and should allow its investors to sleep better at night.
For other blue chips companies to buy during uncertain times, be sure to check out these top 3 ASX blue-chip companies to buy in 2019.
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Motley Fool contributor Elton Wang has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019