The strategies that insurance investors can take to combat the anticipated changes to fiscal and monetary policy, are numerous, says Madison Tse, Managing Director & Portfolio Manager, Guggenheim Investments. Tse says there are challenges and opportunities in terms of investment decisions.
“The basic overarching theme is: Is the Fed still highly motivated to keep
the economy going to support the stability of asset prices?”
In a recently released Clear Path Analysis report, Insurance Asset Management - North America 2022, several market experts from insurance groups including AllianceBernstein, Mercer, and Liberty Mutual, explore issues around good asset management in the post-pandemic world.
“The basic overarching theme is: Is the [US Federal Reserve] still highly motivated to keep the economy going to support the stability of asset prices?” he says, referencing the Fed’s response to numerous geopolitical challenges, the cost of oil, supply chains and the effect on the cost of living. “Clearly, there are risks with slowing down asset purchases. We believe that the Fed will deprioritise inflation versus other parts of its mandate,” he added.
“Following the mantra “don’t fight the Fed”, we still feel that there
is still meaningful backup there.”
So far, the Fed has made fighting inflation one of its key priorities for 2022. The inflation rise has been lined to rising cost of living, which has seen acute political pressure exerted on those in charge of the financial levers.
Tse says for near term risks, there are see occurrences such as the Omicron variant, which caused some pain for several quarters now and is expected to go until 2023 possibly. “Following the mantra “don’t fight the Fed”, we still feel that there is still meaningful backup there and the market clearly expects the Fed to step in and provide support,” he says.
Inflation, however, could have certain good side effects too, with some increases to yield. Tse and the other panellists in the discussion were not wholly against all inflationary pressures. Hitting yield levels was not seen as the ultimate prize, however, some concerns around size and segment were still apparent.
"By chance, most of my clients are concerned with staying fully invested,
which is a nice luxury."
“Size clearly does influence what you are able to articulate. This is definitely a concern,” says Tse. “By chance, most of my clients are concerned with staying fully invested, which is a nice luxury. We try to bring the same opportunities across the board. A lot of our clients look to us for more of a single-sector standpoint.”
However, though rates are rising, the prospect of low rates could still return if current geopolitical tensions such as the war in Ukraine, and supply chain issues were fully resolved. The annual inflation rate in the US accelerated to 8.5% in March of 2022, the highest since December of 1981 from 7.9% in February and compared with market forecasts of 8.4%. It could likely rise in April too.
If not, though, panellists were asked where best to look for alternative sources for fund yield. “In private credit, a lot of this encompasses our structured transactions, which allows us to generate close to equity-like returns,” said Tse.
To learn more about this issue and others facing insurers, read our report Insurance Asset Management North America here.
