From its 19th century foundation, Prudential (LSE: PRU) has been firmly rooted in the UK. But these days the Prudential share price is more likely to be affected by what’s happening in Ho Chi Minh City than in Holborn. Here’s why.
Prudential has reshaped itself
Over the past few years, Prudential has been transforming radically. It demerged its UK investment business M&G. It plans to demerge its American Jackson business this year.
Meanwhile, the Pru has been refocussing its attention onto developing markets. Specifically it hopes to grow in Asia and Africa. But it is in Asia that Prudential has a stronger historical footprint. That is where its growth agenda has most obviously boosted the company’s top line so far.
Asian performance is strong
I think the results from the Asian push have been encouraging. Sales in Asia and Africa increased 14% in the first quarter compared to the prior year. New business profits were up 21%.
Part of the Prudential strategy is to use digital channels as a way to attract new business. Its ‘Pulse’ app has been downloaded 24m times. This seems like a cost-effective way for the company to sign up new customers.
Prudential is where the growth is
What I find compelling about the Prudential strategy is that it is squarely focussed on where it sees growth potential. At its investor day this month, the company highlighted the potential of its Asian strategy. It also shared some promising results that could help boost the Prudential share price if they continue. In India, for example, post-tax profit has grown at a compound annual rate of 31% over the past five years. Such strong growth would be very hard to achieve in mature markets such as the UK and US.
Why did Prudential do well in 19th century Britain? The industrial revolution meant that an increased labouring class wanted to take out life insurance in case they were injured or killed at work. That reassured them that their families wouldn’t be left destitute. The same dynamic is at play now in industrialising, urbanising markets such as Indonesia and Vietnam. Prudential has positioned itself to ride that wave of growing demand.
Prudential share price risks
I like the Prudential Asian focus. But developing markets are sometimes known as ‘frontier markets’. Like many frontiers, the situation on the ground can change fast and risks abound.
Asia is a big continent with significant regional variations. A business model that works in a sophisticated economy like Hong Kong might fail in an emerging market such as Vietnam. There is also a competitive risk from specialised local insurers who understand the characteristics of their own market better than Prudential. Local competitors could defend their business by entering into a price war, which could hurt Prudential’s profitability. A focus on digital channels also exposes the company to risks such as network failure or information loss.
But with a 20% increase in the Prudential share price over the past year, the City seems to like Prudential’s Asian focus. If it continues to deliver, I think it could further boost the share price. My portfolio is heavily weighted towards UK stocks. I like the fact that Prudential is a UK stock but it offers me global exposure. I would consider adding it to my portfolio.
