Tim Antonelli, Head of Insurance Multi-Asset Strategy and Portfolio Manager at Wellington Management, explains his outlook for the US economy, what it means for insurers' investment strategies, and how insurers can prepare for what comes next.
What is your outlook for the US economy in the last few months of this presidential election year?
The August equity market volatility aside, the US economy remains on a relatively strong footing. Recent earnings have surprised on the upside and the consumer continues to spend. At the same time, we have seen softening in the labour market, which has lined up the Fed to begin cutting rates in the later stages of 2024 and into 2025, perhaps aggressively. So, from a fundamental perspective, I think things look pretty good.
However, the environment is not without left-tail risks to consider, including geopolitical turmoil in Ukraine and the Middle East and the associated market volatility. This is also a year with an extraordinary number of elections — more than 60 around the world.
Not every election translates to large market shocks, but each can create noise on the margin, as we saw with the recent French snap election. Of course, the US election is likely to have wide-ranging economic and market implications — because of the US dollar being the world's reserve currency, but also because of the stark contrast between the candidates' trade and international relations policies.
Trump's plan to impose tariffs on all imports would have a knock-on inflationary effect on US consumers, while Harris has advocated for a continued focus on globalisation, while using subsidies to increase domestic production (which is also inflationary).
Given that outlook, where should insurers be focused when it comes to their investments?
As we head into the fourth quarter, I think insurers should consider:
- Looking past near-term market noise and concentrating efforts on investing in long-term winners to help build surplus — e.g., when the market sells off, consider taking the long view and buying the correction.
- Planning for a normalised interest-rate environment. Lofty all-in investment yields are likely to disappear in the not-too-distant future, so insurers should have a game plan for yields in a "normal" rate environment. Ideas might include adding investment-grade private credit, diversifying with securitised assets, and expanding a portfolio into other regions. It wasn't long ago that a basis point of yield was of critical importance!
- Understanding a portfolio's exposure to the US trade picture. A Democratic presidency is likely to be more positive for non-US developed markets, while a Republican presidency may benefit the US market more. If deglobalisation continues, the impact on many countries could be significant.
Beyond this election year, what are the key trends affecting investments that insurers should be aware of?
I expect a world with more macroeconomic volatility, more dispersion across regions, asset classes and sectors, and a much more complex environment for insurers to invest in.
We are moving away from a global economy marked by consistently low inflation, an emphasis on globalisation and trade, and low rates/easy money.
The new world could see central banks trying to balance growth with inflation, activist governments focusing on on-shoring or near-shoring, countries targeting energy independence and spending accordingly, and artificial intelligence being a force that separates winners from losers across all investable assets.
In this environment, I think insurers should fight complacency and consider being more opportunistic and tactical, while managing left-tail risks. Static asset allocations will likely be a thing of the past.
How can insurers prepare for periods of sustained inflation and economic volatility?
Insurers are invested in asset classes that tend to perform well in periods of high/low growth and low inflation. They rarely have exposure to assets that perform well when inflation is higher. But if we are heading for market environments more like 1970 – 2005 than 2005 – 2022, we may see more periods of stagflation or high inflation/high growth.
Insurers are beginning to consider options, such as dedicated inflation-linked bonds, emerging market debt, REITs and real estate broadly, infrastructure with inflation pass-throughs, and more floating-rate exposures across fixed income sectors.
Given your outlook for volatility, how should insurers think about illiquid asset exposure?
Diversification within insurers' illiquid asset portfolios could become more important. To help, they could consider investing up and down the credit quality spectrum and seeking manager and vintage-year diversification. Insurers might also consider using the secondary markets for risk management and building out target allocation levels. Finally, insurers should ensure they have off-balance-sheet funding sources available, whether it be lending agreements, letters of credit, or borrowing from someone like the FHLB.
How can insurers become more opportunistic/tactical to take advantage of the dispersion you mentioned?
Embrace a solutions mindset! We are having more conversations than ever before with insurers who have specific return objectives they want to hit with their surplus investments, but who also have risk tolerance limits tied to potential drawdowns or risk capital consumption. Working together, we are able to use a variety of building blocks to pursue their investment objectives while staying within risk parameters.
In conclusion, in a world where all assets don't move up in lock step, I think insurers should place a premium on flexibility, dynamism, and forward thinking.
