Insurance Multi-Asset Outlook | Inflation, rates, and volatility: The best defense is a good offense

Wellington

In this latest white paper for insurers from Wellington Management, Insurance Strategist and Portfolio Manager Tim Antonelli shares his latest multi-asset views for insurers, including the mounting need to balance defensive portfolio strategies with continued income and return generation. This is the first of two papers intended to help insurers plan and prepare for 2023 and a new capital market regime.

Key points

  • Expect weaker economic growth ahead. Central banks will be fighting inflation and slowing growth, with varying regional impacts. Higher rates, tighter liquidity, and weaker financial conditions suggest downside risk to earnings and multiples, leaving us favoring reserve-backing fixed income over risk assets. 
  • There are select opportunities in core fixed income, balancing the tug of inflation against elevated recession risks. Valuations and central bank hawkishness suggest a long US-rates posture versus short European rates. While current spreads are not especially attractive, “all-in” yields and the income they provide look strong versus recent history. 
  • Within global equities, we think fundamentals favor the US and Japan over Europe and emerging markets (EMs), while we continue to have a moderately bullish view on commodities. 
  • Downside risks to our views include a severe recession in the US or Europe, a currency-induced sovereign crisis, and an escalation in the Russia/Ukraine conflict. Upside risks include a “soft-landing” scenario — where the US Fed tightens policy just enough — and significant policy intervention in China. 
  • Overall, the dynamism of today’s global landscape highlights the need for insurers to act swiftly and tactically when needed to pursue income and return potential amid large market dislocations. This is not a “set it and forget it” environment, nor will it be in 2023.

Inflation, rates, and volatility. In today’s risk-laden environment, the best defense is a good offense. Here are our latest multi-asset views for insurers, including the mounting need to balance defensive portfolio strategies with continued income and return generation.

The equity rally in July and August seems like a distant memory, with market optimism having been wiped out by higher inflation readings, more central bank tightening, another natural gas supply shock, continued weakness in China, and corporate earnings warnings. In addition, divergent monetary and fiscal policies — highlighted by the UK’s initially conflicting signals on these fronts — are driving market volatility and dislocations. On balance, we see tighter monetary policy and the risk of lower corporate earnings and multiples weighing on surplus assets over the next few months. But in this environment, the risk/return profile of assets can change dramatically, and we are on the lookout for prices being driven down by factors other than fundamentals. Among the signals we will be watching to assess whether it’s time to add risk: Is the market pricing in a severe global recession, and is the economy sufficiently weak or inflation sufficiently contained to trigger a pause in US Federal Reserve (Fed) tightening?

The dynamism of this situation highlights the need for insurers to move quickly and streamline governance and oversight to capture upside potential in the face of large market dislocations. This is not a “set it and forget it” environment for surplus assets, nor will it be in 2023.

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Wellington Management
Wellington Management

Insurers have been building investment partnerships with Wellington since 1975. With $140 billion AUM as of June 30, 2022, our goals since then have remained evergreen – to exceed the investment objectives and service expectations of our clients. As an integral part of Wellington’s global investment platform, our dedicated Financial Reserves team offers a breadth and depth of resources and experience to serve our insurance clients as a go-to thought partner, risk manager, and trusted advisor for complex investment challenges. The new decade we have just entered looks more treacherous from a risk perspective than anyone could have imagined. Our collaborative strategic and proactive risk management approach helps our clients to be well-prepared.

Rich Coffman
Americas
rmcoffman@wellington.com
+1 617 951 5311

Max Davies, CFA
APAC
mdavies@wellington.com
+852 2846 6011

Sarah Marschok
Americas
smmarschok@wellington.com
+1 617 790 7170

Bob Sharma, CFA
EMEA
bssharma@wellington.com
+44 20 7126 6068

www.wellington.com/en

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