Many in the insurance asset management sector have been growing increasingly sure that a market downturn – particularly in equities – was on the horizon.
There was little consensus of how far off that horizon was, but market ructions in early August came as something of a warning that there could be some very bad things to come.
While insurance asset managers have been reaping the benefits that high and stable interest rates have handed to their fixed-income portfolios over the past couple of years, the rout that the equity markets saw recently have gone some way to undoing much of that benefit.
Japan seemed to be at the head of the market correction – which might have more to do with the overall economic outlook for the country and less to do with Japan’s time zone. The nation continues to move away from negative-rate policies – putting its base rate up to 0.25% - which has played havoc with the yen.
Does this presage a real market correction? The jury is still out, but weak economies in Asia Pacific with China at the head of the pack, have been partly responsible for the market uncertainty.
Many insurance equity investors are also waiting for the other shoe to drop as technology stocks begin to look increasingly less waterproof. Warren Buffett’s selling half of Berkshire Hathaway’s Apple holdings will have caused many to wonder what the Sage of Omaha knows that they don’t.
Investors in Nvidia might also usefully be wondering what comes next.
And the dithering and obfuscation from some central banks over when they might start to lower interest rates is causing much uncertainty. While the Federal Reserve was tipped to start lowering rates very soon, the most recent US jobless data will have given them pause.
The problem is compounded in APAC since it is still seen as the engine of global growth for many sectors – and the insurance sector in particular.
If history teaches us anything, it is that markets are cyclical. If asset managers had been peacefully enjoying a well-earned summer in the sun on the back of high interest rates and healthy growth in equities, then the recent market turmoil was a sharp reminder that winter is coming.
After all, that’s why hedge funds were invented all those years ago. But when the outlook is bleak across all correlated asset classes, it will be difficult for insurance asset manager to know where to turn.
On the geopolitical stage, there is still huge uncertainty emanating from the US that will not dissipate until after the election, an increasingly uncertain-looking picture emerging from the Middle East and the impact it will have on oil prices, Russia president Vladimir Putin’s continued invasion of Ukraine pockmarking global supply chains and much more.
It’s an increasingly volatile old world and one that could play into the hands of underwriters. But that will be cold comfort to insurance asset managers trying to make the best of an investment landscape that doesn’t look very familiar at all. A
Paul McNamara
Editorial director
Asia Insurance Review