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“The market is searching for equilibrium.” That was the summary from Michael Siegel, Global Head of the Insurance Asset Management and Liquidity Solutions businesses, Goldman Sachs Asset Management, last week as he presented the results of the company's Risk & Resilience: The 13th Annual Global Insurance Survey in a webinar that highlighted lingering memories of recent market volatility among insurers.
The survey, released in full today, drew insights from 359 Chief Investment Officers and Chief Financial Officers representing more than $13 trillion in balance sheet assets on their views of risks in the market. It was conducted in January and February 2024 and saw respondents split into three regions – Americas, EMEA, and Asia, and showed that insurers greatest concerns were an economic slowdown or recession in the US as well as equity market volatility. It also further highlighted the US and rest of the world divide on ESG.
“Global growth is on a steady path, with US GDP projected
to expand 2.4% in 2024."
The macroeconomic conditions were the headline results for the survey; 52% of respondents saw an economic slowdown or recession in the US as their number one economic risk.
There was also a decline in the concern about inflation compared to 2023 - from 55% to 42% - partly as a result of the inflation rate drops in the US and across most western countries. “Yet longer term recession fears persist, as 50% of respondents expect a recession in the US within two to three years – up from 38% in 2023,” said Siegel.
The respondents' fears were somewhat mixed when compared to Goldman Sachs Asset Management’s views, which were of a largely positive US economic outlook for 2024. “Global growth is on a steady path, with US GDP projected to expand 2.4% in 2024 on a fourth quarter over fourth quarter basis, while progress on core inflation and labour market rebalancing support our expectation of a soft landing in 2024,” said Jan Hatzius, Chief Economist and Head of Global Investment Research in the report on the survey. “Given the more encouraging inflation outlook, we expect that the [US Federal Reserve] will cut for the first time in June and project three 25bp rate cuts in 2024 overall.”
Siegel said most respondents thought inflation was "transitory" and the survey saw a decline in investor expectation of it being a medium-term issue. “However, it increased in long term expectation,” he said.
The results around the potential for a recession were similar to last year’s answers too, he said, showing that despite this waning volatility and lowering inflation, unease about the US economy would linger for some time.
"Insurers are showing signs of cautious optimism about markets
and the global economy in 2024.”
“16% of respondents said there could be a potential recession in the current year,” said Siegel. “[And] 66% thinks a US recession will be in the next 2 to 3 years.”
“The weak returns of 2022 remain fresh in their memories, while global inflation has remained elevated,” Siegel said in the Goldman Sachs Asset Management press release on the results.
However, “After a year of stronger than expected economic returns, insurers are showing signs of cautious optimism about markets and the global economy in 2024," he added.
The survey data shows the top five macroeconomic risks to insurers’ investment portfolios are:
· Economic slowdown/recession in the US (52%)
· Credit and equity market volatility (48%)
· Geopolitical tensions (46%)
· Inflation (42%)
· Monetary tightening (27%)
Only 7% of insurers identified economic slowdown/recession in China as a top risk, and 6% cited deflation or a large-scale cyber event.
The survey broke down risks as identified by the respondents into several categories, which were separated by geographic location as well.
For investment risk, respondents from the Americas were concerned about the deterioration of credit quality, while Asian respondents were most concerned about rising interest rates.
Siegel highlighted the current situation with Japan and other east Asian markets, which have experienced a different interest rate cycle to North American and European markets.
For duration risks, “a substantial amount [of respondents] wanted to increase duration risk – the highest number in 13 years and consistent across all regions,” said Siegel, which he said could be related to possible interest rate cuts by the US Federal Reserve.
On liquidity risks, it was much more mixed among respondents – the 7% increase in the risk being marked as one to watch, but this varied distinctly by region. Americans surveyed were more keen on being less liquid, whereas European insurers wanted more liquidity in their portfolio, which Siegel said was reflected in asset allocation.
For which asset classes were of the most importance to the respondent, fixed incomed asset classes were at the top of the list, said Siegel, who also highlighted that the difference between the Americas, EMEA, and Asia were among the widest the survey had ever seen in this area.
Unusually, private equity, which was usually high on the list, was lower this year.
“Overall, insurers are looking towards private assets,
in part to diversify their exposure."
The lowest ranked were cryptocurrency and real estate equity.
Americas respondents' wanted more allocation to private credit. “We saw a very strong response in private credit,” said Siegel. This was also attributed to the “booming” market in bulk annuity in the US. With other reasons for its popularity being an attractive overall level of yield.
“Overall, insurers are looking towards private assets, in part to diversify their exposure, with 53% of respondents ranking Private Credit among the top five asset classes with highest expected return,” said the survey.
This was contrasted with EMEA respondents who were more concerned about liquidity, which was reflected in the top-rated asset classes.
In Asia, the continued demand for private credit saw it take the top slot.
For allocation decisions, two emerging trends were apparent, said Siegel. The accountancy changes in east Asia markets had made some changes while European actions were driven by ESG considerations.
95% of EMEA respondents listed ESG as a consideration to their investments, compared to 68% of those from the Americas.
For the first time, the survey also charted opinions on artificial intelligence (AI), with “strong” responses recorded.
“29% reported using it in their business already,” said Siegel, largely based around figuring out ways it could be used to reduce operation costs, but some were also using AI in the highest return areas first. Globally, around 20% were using it to evaluate investments.
