Insurance Multi-Asset Outlook — Politics, policy, and the pandemic

Tim Antonelli and Daniel Cook share their latest multi-asset outlook for insurers, including upside and downside risks in today’s extraordinary environment.

Views expressed are those of the authors and are subject to change. 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. For professional or institutional investors only.

Key points

  • Potential treatments/vaccines for COVID-19, policy support, and gradually reopening economies make us more comfortable taking a pro-risk stance over our 12-month time frame.
  • However, the equity market’s rebound and the prospect of a slow economic recovery leave us only moderately bullish on risk assets.
  • Within equities, we prefer the US and the growth and quality factors, although we think some higher-quality cyclical companies are attractive.
  • We think interest rates will likely stay low for some time and find some credit spreads attractive relative to government bonds.
  • Downside risks include the US election, a second wave of COVID-19, a deeper and longer recession than anticipated, and worsening US-China relations.
  • Upside risks include a faster-than-expected, safe/effective COVID vaccine; another major dose of policy stimulus; and/or a sharp economic rebound.

The contrast is stunning: The worst economic downturn since the Great Depression has been followed by the greatest equity market rebound in history. But we reject the theory that the market is in a bubble. We think the technology sector, whose rally has raised the most alarm, enjoys excellent fundamentals and could continue to exceed investor expectations in a low-growth world.

US election risk is also top of mind with investors, as the large number of mail-in ballots is likely to mean delayed results and legal challenges, perhaps even civil unrest. The uncertainty may be a negative for global markets, but we expect election volatility to be temporary and are more focused on what comes next.

Over our 12-month horizon, the main reasons to own risk assets, in our view, are:

  • Progress on treatments and vaccines for COVID-19;
  • Continued fiscal and monetary policy support;
  • Gradual reopening of economies worldwide; and
  • Positive demand technicals for developed markets in a near-zero yield environment (Figure 1).

Our bullishness, however, is tempered by global economic indicators that remain well below pre-COVID levels; the reduced fiscal and monetary “oomph” of the latest policy actions; and COVID uncertainty, including a possible second wave, the path of vaccine trials and distribution, and the vaccine take-up rate.

FIGURE 1

"TINA" more relevant at near-zero yields

We continue to prefer US equities given our expectation that global growth will recover slowly. The “TINA” effect (“There is no alternative”) is powerful considering low fixed income yields and the potential yield, earnings growth, and relative safety that US equities may provide. Additionally, we have seen insurance companies meaningfully increase their…

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