What are the likely directions for insurance portfolios into 2014? The future’s bright, says Chris Morris, co-head of investments at Amundi (UK).
Managing insurance portfolios has been challenging in 2013. Yields are low but the macroeconomic cycle has started to turn, and volatility has picked up. Core bonds that had appeared to offer ‘safe haven’ status have been shown to be very risky, and still offer a very asymmetric risk-return profile. For the balance of this year, the main emphasis will be on avoiding mishaps. Insurers have enough to worry about on the liabilities side of the balance sheets: they do not need nasty surprises from the assets side. Event risk is high—Syria; German Constitutional Court; US debt ceiling; emerging markets unrest—and hard-won performance can easily be lost, especially if the manager has been tempted to extend duration on the optically higher yields on offer.
Markets are forward-looking, and much of the expected recovery is already priced in. The key judgements will be how much pent-up demand remains in the mature markets, and whether inflation will rise to more normal levels from the very low levels to which they have fallen. The US recovery is the most advanced. Recent data have been encouraging, but some question marks have recently emerged on how strong the housing recovery will be. Fortunately, there are signs that the improving labour market, demographics, and credit trends will release more of the pent-up demand and lead to a further reinvigoration of the housing market later this year. Consumer confidence is rising, leading to higher auto sales and purchases of durable goods. US banks are now ready and able to increase the credit they are providing to both households and firms, helping drive the recovery on.
Europe is more complicated. Growth in Europe has lagged that in the rest of the world, as eurozone policymakers have forced through massive fiscal consolidation and bank deleveraging. Despite this, growth is finally starting to pick up. The core economies are leading, but peripheral nations are also enjoying an export-led recovery that is helping them catch back up with the core nations. It is important that Europe keeps monetary conditions extremely accommodative so that the nascent recovery has a chance to gain traction.
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Intelligent Insurer, Amundi, Chris Morris, Europe, Insurance