AIA HK, Chubb Life upbeat on risk assets ahead of likely rate cuts
AIA Hong Kong and Chubb Life maintain a positive outlook on risk assets such as equities, confident in their potential for growth despite elevated valuations and persistent volatility, following an anticipated US rate cut later this week.
Emerging markets may also become more attractive as the strong US dollar begins to weaken, senior investment executives told AsianInvestor’s 15th Insurance Investment Briefing in Hong Kong on September 5.
“We are slightly positive on where equities are going to go,” said Sam Morgan, chief investment officer at AIA Hong Kong. “But obviously, less [upside] than the beginning of the year.”
AIA Hong Kong has been overweight on equities since January, a strategy that Morgan noted “has been a good call”.
While some predict nine to 10 rate cuts by the US Federal Reserve by the end of 2025, Morgan considered this "too much", describing the current market as being "on a knife edge".
Despite the strong performance of equities, he believed there is still room for growth. “But if there’s a recession, then I’m wrong on all fronts. I think that’s really the key factor,” the investment chief said.
The liability-driven insurer aligns guaranteed products with fixed income, using derivatives to manage duration and asset-liability gaps. For non-guaranteed benefits, it aims to maximise returns for policyholders and shareholders.
CAUTIOUS ON SPREADS
Morgan is “quite negative” on long-duration credit, which insurers typically hold in large quantities.
“I'm extremely pro-credit. I think credit is a great, a great way to essentially pick up risk premium. But when [the spreads are] at such compressed levels, particularly the very long end, I find it hard to justify,” he said.
Most AIA portfolios are managed on a total return basis under Hong Kong’s risk-based capital regime (RBC) and the International Financial Reporting Standard 17 (IFRS 17) accounting standards.
While current total returns look appealing, Morgan raised concerns about the potential effect of rate cuts.
“If rates were to fall by 100 basis points, what would happen is spreads would actually blow out by 50 basis points.”
As a result, he favoured risk-free fixed income over credit-sensitive assets, cautioning that widening credit spreads can significantly impact credit-exposed portfolios.
EM BENEFICIARIES
Chubb Life
Ben Rudd, chief investment officer at Chubb Life, observed that the market has been a somewhat “schizophrenic” as the rate cut outlook shifted several times throughout 2024.
But he believed the risk of a major recession was lower than some might fear, justifying a constructive view on risk assets, despite pockets of overvaluation that could be prone to volatility.
As long as the US economy avoids a recession, Rudd said certain risky assets could perform relatively well, though he refrained from naming specific asset classes.
If rates fall gradually without triggering a major recession, emerging market assets and currencies may benefit from a weakening US dollar, he said.
“I think that will be a very, very interesting phenomenon to see,” Rudd said. “It is helpful for most of us here in one way or another, because we all have local currency businesses. Therefore, we would be relative beneficiaries in terms of local currency strength versus the dollar. So, fingers crossed on that one.”
BOC Life
Xing Tao, chief risk officer at BOC Group Life Assurance Company, identified interest rate risk and credit risk as the key risks for life insurers.
With interest rates still at elevated levels, he said it could be a good opportunity to buy high-quality bonds – rated A or above – to lock in yields for liability matching and meet long-term return assumption in product pricing.
“At the same time, you can still use this chance to build a defensive fixed income portfolio to improve the credit quality to ensure if credit spread widens, your impact will be less than before,” he said.
The global economic downturn has increased volatility, making asset-liability matching even more crucial, Xing noted.
“No matter the market increases or decreases, as long as your liability can offset most of the market volatility, your financial position can still be stable after the RBC implementation [in Hong Kong].”
DIVERSIFICATION A KEY
Tim Antonelli, head of multi-asset strategy for insurance at Wellington Management, believed there will be more divergence in how central banks balance growth and inflation targets.
Hence, he advised insurers to diversify across different asset classes, stress-test historical correlations, and identify potential defensive hedges in the event a market selloff.
“Thinking about things from the perspective of diversification and not just return potential will become increasingly important,” he said.
He also noted that if investors focus on fundamentals rather than just valuations, risk assets remain attractive, as corporate balance sheets in the US continue to be robust despite the high-rate environment.
“I would focus on balance sheet quality, both within your equities and fixed income allocations. But I wouldn't take your foot off the proverbial risk allocation at this point, because I do think that there's still room to run across asset classes,” said Antonelli.