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Manulife Downgraded to Neutral

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We are downgrading our recommendation on the shares of Manulife Financial Corp. (MFC - Free Report) to Neutral from Outperform based on its declining wealth management sales in the Canadian market.

Canada wealth sales declined 5% as the competitive environment and continued low interest rates adversely impacted investment product sales. We expect this line to remain under pressure in the coming quarters given the current market scenario.

Moreover, volatile global equity markets and low bond yields exert pressure on the company’s capital position. Manulife had to raise its reserves to guarantee future liabilities, which eventually resulted in capital drain. We expect the global equity markets to remain weak and unpredictable in the near future. Due to this, we anticipate higher reserve charges for its equity-linked products, which will further weigh on its earnings per share.

Counting on the positives, Manulife is effectively building its hedging program in order to bring down interest rates and equity market exposure. During 2011, the company decreased its earnings sensitivity to both these variables.

It has already achieved its 2014 goal of offsetting interest rate sensitivity, in addition to its goal for the current year. It has also accomplished 93% of its 2014 goal for equity market sensitivity. We believe that these steps will help Manulife emerge as a stronger company, shielding it from market variables on which it has no control.

Manulife has a diverse global presence, with 75% of its earnings coming from outside Canada. Its presence in the Asian market -- for over a century -- gives it a competitive edge. Changing demographics have consequently increased the demand for insurance and wealth management products in the region and Manulife is poised to benefit from its longstanding presence.

Manulife maintains a high-quality investment portfolio. Its invested assets have limited exposure to the high-risk areas, and these are highly diversified by sector as well as geography. In addition to all these, we believe that the company’s investment management strategy is quite impressive.

Manulife is scheduled to release its second quarter earnings on August 9, 2012. The Zacks Consensus estimates the company to earn 7 cents per share, which would translate into year over year decline of 72.59%.

Manulife closely competes with China Life Insurance Co. Ltd. (LFC - Free Report) and Sun Life Financial Inc. (SLF - Free Report) . The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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