Are Aviva shares in danger of a fresh price collapse?

Aviva shares have been on the march again in recent weeks. But is the FTSE 100 life insurer now at risk of a sharp pullback?

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Aviva‘s (LSE:AV.) one of many FTSE 100 shares that have soared amid rising hopes of interest rate cuts. But it’s not a foregone conclusion that the Bank of England (BoE) benchmark rate will topple, as many now expect.

The Organisation for Economic Co-operation and Development (OECD) recently cautioned that UK interest rates should remain at current levels until inflationary pressures recede. BoE rate-setters also overwhelmingly share this conservative view. It’s why they kept rates locked at 5.25% at the last meeting by a vote of eight-to-one.

Implications for the firm

Consumer price inflation (CPI) is falling in the UK, and dropped to two-year lows of 3.2% in March. But price rises aren’t moderating as fast as some hope, and may remain above the BoE’s 3% target for longer than the market has priced in.

Wage growth continues to run hot, while new Brexit import charges are tipped to add 0.2% to CPI over the next three years. At the same time, growing tension in the Middle East could send oil prices to fresh multi-year highs.

So what would this mean for Aviva? Customer demand for financial services could remain muted if inflation and interest rates remain at elevated levels. Claims costs may also remain high, while the returns the company makes on its investments may also be impacted.

The subsequent drag on profits could have a marked impact on Aviva’s share price. And especially following its healthy share price gains in 2024. It’s currently up around 9% since the start of the year.

A top buy?

Yet despite this threat, I believe the life insurance and pensions giant remains a terrific stock. It’s why I’m considering adding more of it to my own Stocks and Shares ISA.

As I say, Aviva shares are in danger of a fresh sell-off. But this doesn’t put me off. I invest for the long-term, and over this sort of timescale I believe the company has terrific investment potential.

Demand for wealth, retirement and protection products is set to rise strongly as the number of elderly people in its British, Irish and Canadian territories increases. In Aviva’s core UK marketplace, one in five people are tipped to be 65 years or older by 2030.

Aviva’s proved it has the brand power and the knowhow to capitalise on this enormous opportunity too. In life insurance, for instance, it holds a 23% share of the UK market, making it the country’s biggest protection provider.

Too cheap to miss

I also like the progress it’s making to expand its bulk annuity operations. It’s targeting total business of £15bn-£20bn between 2022 and 2024. A cash-rich balance sheet will give it options to continue growing inflows at a rapid pace as well.

I don’t believe the firm’s current share price reflects this bright outlook. Its price-to-earnings (PEG) ratio stands at 0.7, below the benchmark of 1 that indicates a share is undervalued.

With Aviva also carrying a 7.4% dividend yield, I think it’s one of the FTSE 100’s best value stocks to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Aviva Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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