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deserted road

Insurance Multi-Asset Outlook — Rising rates: Threat or opportunity?

Tim Antonelli, CFA, FRM, Multi-Asset Strategist
2022-03-31
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

KEY POINTS

  • Encouraging COVID vaccine progress, ample government policy support, and gradually reopening economies worldwide make us reasonably confident in taking a more pro-risk stance over a 12-month time frame.
  • Are rising interest rates here to stay? Rates could rise further from here, and while that can present challenges for total return in duration-sensitive markets (such as long-duration fixed income and growth-oriented equities), it should offer attractive reinvestment opportunities for insurers looking to generate incremental spread.
  • We think vaccine-driven reopenings will be the catalyst for a continued rotation from growth- to value-oriented investment exposures. Within equities, we prefer Europe, Japan, emerging markets, and smaller caps and think cyclical sectors are attractive relative to growth sectors.
  • We expect inflation pressures to begin showing up sooner rather than later, potentially improving the outlook for commodities and related inflation-hedging sectors.
  • Downside risks include a sharp spike in rates, disappointing vaccine take-up rates, and waning stimulus effects. Upside risks include another major dose of policy stimulus and faster or broader reopenings than expected.

THE DARKEST DAYS OF THE PANDEMIC SEEM TO BE BEHIND US. COVID vaccines are being distributed and administered around the globe, which augurs a material pickup in economic growth later this year. In addition, developed market policymakers, perhaps recalling inadequate responses during past crises, have kept fiscal and monetary support in high gear. Risk assets have responded favorably and the rotation from growth to value has gained momentum.

As we map the road ahead, we think it’s worth contemplating the possibility of a strong but relatively short recovery. The next phase of the rebound, when services widely reopen, employment grows, and overall activity improves, should be positive for risk assets. However, we seem to be moving quickly from early-stage to late-stage asset behavior, judging by the rise in inflation-sensitive assets like cyclicals and commodities. We think rising global demand, higher commodity prices, low inventories, and wage pressures, among other factors, could push up inflation and inflation expectations sooner than the market expects. In addition, we expect more bouts of the market challenging the US Federal Reserve (Fed) by driving real yields higher.

Ultimately though, we think the Fed will stick to its commitment to look past higher inflation prints and keep policy rates pinned at zero. As a result, the runway for cyclical assets to outperform likely extends through..

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Authored by
Tim Antonelli
Tim Antonelli, CFA, FRM
Multi-Asset Strategist
Boston

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