Stephen Metcalfe: Interest rates in Asian economies have significantly reduced over the past decade, creating many of the same challenges for investors, albeit to a lesser extent than for Western economies. That said, Japan has had near-zero interest rates for far longer than most economies and so, even within Asia, it can be a split picture given the diversity of the various markets.
Increased money supply from central banks and demand from institutional investors in the context of evolving regulatory capital regimes have driven rates down both at the shorter and the longer end of the curve. This has led to investors searching more widely – sometimes beyond their comfort zones – for better-rewarded and diversified risk premia for higher yields.
"Inflation had been relatively subdued up until last year, but we are now seeing
US inflation at the highest level it has been in four decades."
More recently, rates have started rising and, looking forward, we might expect them to gradually normalise towards their higher long-term averages, meaning the now-relatively-unfamiliar question investors are faced with is what to do amidst an increasing rate and what could turn into a higher-than-expected inflationary environment. Inflation had been relatively subdued up until last year, but we are now seeing US inflation at the highest level it has been in four decades, which puts even further pressure on real yields as rate increases struggle to keep pace.
Stephen: Markets wise, the post-pandemic world looks fairly similar to where things were before it. The market adjusted back to pricing the longer-term on expectations of a return to normality. Where there could be more changes made in response to market movements would be the shorter-term tactical positions we take to either reflect our short-term views or to opportunistically capture pricing anomalies.
"The escalating geopolitical crisis in eastern Europe and the knock-on
impacts it will have on both the markets."
As we look forward though, I’d see a range of other more pressing issues than the pandemic: In the short to medium term, the escalating geopolitical crisis in eastern Europe and the knock-on impacts it will have on both the markets – including supply-side disruptions and accompanying inflation – and on other geopolitically sensitive situations are a key investment risk to be prepared for.
Over the longer term, it would be the numerous environmental issues we are facing that that may influence investment decisions – increasing temperatures, pollution, and overfishing, which could lead to scarcity of water, food and increased political tensions.
Stephen: In general, capital regimes are becoming more risk-based and therefore more aligned with economic movements, rather than necessarily being more stringent per se. These moves are helping to move insurance industries around the region towards a more sustainable and resilient capital position in the long term, thereby helping ensure we can offer our policyholders the security of returns and guarantees they deserve.
This creates an opportunity for institutions like Prudential that have long been following capital market-consistent and risk-conscious decision-making processes for managing their capital resources. I can see how it could potentially create a capital squeeze for firms that have been following less-economic capital management approaches to date though.
Fortunately, the design and establishment of a robust capital management framework and making use of a variety of capital solutions, these companies can conduct holistic trade-off analysis across multiple metrics to identify and execute the best balance sheet management actions to improve their capital position by removing poorly rewarded risks from their portfolio. If there’s sufficient headroom, they can then improve their capital allocation efficiency by replacing them with better-rewarded risks to produce better risk-adjusted returns on capital.
Stephen: Capital markets are constantly adjusting for news flow and so, even if there are long-term views underpinning our strategies, it is key to have a level of dynamism built into the investment process to be able to reprice for latest market movements quickly.
"Computing and systems technology are vital to delivering the best possible
results to customers and all our stakeholders."
Data processing and analytics technology is evolving at such a fast pace now that it requires institutions to strike the right balance for their own objectives and constraints, between the opportunities of technological advances with the challenges and costs of implementing systems to yield those benefits. Whilst modular technologies can help make implementation processes easier, the inherent interconnectedness between investment frameworks, processes, systems, and other infrastructure lead to technology decisions being tough and complex ones.
Despite the associated challenges of any implementation though, computing and systems technology are vital to delivering the best possible results to customers and all our stakeholders.
Stephen: I see capital markets and financial structuring technology as one of the most exciting areas of opportunity and technological advancement in the APAC region.
Capital markets around the region are rapidly expanding and gaining depth and liquidity, leading to an increased range of instruments, products, and structures for institutional investors to choose from. This also creates potential to build better and better insurance products for customers.
"When one operates and invests in Asia, one is investing in many
different and diverse markets."
I have seen an increase in the level and sophistication of balance sheet solutions and structuring techniques being applied to both sides of the balance sheet in the region. This ranges from physical asset allocation to broader, non-traditional categories of alternative assets – for enhancing returns, improving portfolio diversification, or accessing assets in line with ESG and sustainability objectives – to synthetic balance sheet solutions using derivatives, reinsurance and other capital and funding solutions to manage our key financial resources, capital, liquidity, and leverage.
When one operates and invests in Asia, one is investing in many different and diverse markets. Given the different stages of maturity of the markets, this can involve investing time with key partners to build new markets, investment products and balance sheet solutions.
