Insurance Multi-Asset Outlook

Strong but slowing growth: A tale of two narratives

Tim Antonelli, CAIA, CFA, FRM, SCR, Head of Multi-Asset Strategy - Insurance and Portfolio Manager
Daniel Cook, CFA, Investment Strategy Analyst
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  • The levels of both economic growth and government policy support remain largely supportive but have declined marginally, leaving us pro-risk still but less so than last quarter.
  • Within global equities, we prefer Europe, where economic fundamentals are improving and German elections may pave the way for stronger fiscal stimulus.
  • Inflationary pressures are likely to persist, potentially benefiting assets with a historically positive beta to inflation.
  • Interest rates in the US and elsewhere are vulnerable to higher or more persistent inflation and could therefore rise going forward.
  • Downside risks include a sharp spike in interest rates, renewed COVID-related lockdowns, and the potential for government policy mistakes. Upside risks include a lift in inflation-capping productivity or a broader and more sustainable economic reopening than expected.
  • In terms of investment implications, we suggest that insurers use their core fixed income as a defensive allocation; be selective in the credit markets; look at opportunities in European equities; and consider adding some commodities exposure.

IT’S HARD TO BELIEVE WE ARE ALREADY INTO THE FOURTH QUARTER OF 2021. Planning for the next fiscal year has begun in earnest, with insurers across the globe considering the optimal positioning of their investment portfolios heading into yet another year end of heightened uncertainty that could spill over into 2022. As always, we believe that a laser-like focus on fundamentals, while leaving “no stone unturned” in the search for opportunities, should serve as the proverbial guiding light for insurers and other asset allocators.

The path of the COVID-19 pandemic, ongoing for a year and a half now as of this writing, remains key to the global economic outlook, and what we’ve learned about it since last quarter isn’t particularly promising: Additional variants of the virus are possible (and potentially more transmissible and virulent), vaccine-induced “protection” from it could wane over time, and a significant percentage of the global population remains unvaccinated.

This sobering new reality is reflected in reduced economic activity, the resurgence of growth stocks over their value counterparts, and a return to record lows for long-maturity yields in recent months (see Figure 1 in PDF available below). On a more positive note, global growth is still relatively strong overall, most economies are unlikely to go back into “lockdown” mode, and monetary and fiscal stimuli remain largely supportive. All of this leaves markets caught between two hard-to-reconcile narratives: The pace of economic growth seems poised to slow, but the level of growth is likely to remain above par for the foreseeable future.

Against this somewhat conflicted backdrop, we continue to maintain a pro-risk investment stance, generally favoring equities over high-yield credit for insurers’ surplus investments in the public markets. But relative to last quarter, our optimism is tempered to some degree by a subtle downgrade to our macro and policy outlook — including the potential for…

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Authored by
Tim Antonelli, CAIA, CFA, FRM, SCR
Head of Multi-Asset Strategy - Insurance and Portfolio Manager
Daniel Cook, CFA
Investment Strategy Analyst