Insurers weigh risks around China, inflation and rising sovereign debt
While some investment heads at insurance firms have welcomed the positive portfolio implications of interest rate cuts, most notably in the US, others are voicing worries over inflation, growing sovereign debt and geopolitical risks, such as tensions between China and Taiwan.
For one thing, the US is likely to increase public spending, regardless of who becomes president in November, said Michela Bariletti, chief credit officer at Britain’s Phoenix Group, and Ashish Dafria, chief investment officer of UK-based Aviva.
Both executives spoke at a panel at the Insurance Investor Live forum on September 26 in London.
Aviva
“Fiscal conservatism is an endangered species – I think we all have seen that,” Dafria said.
"One of the few things in common between the two US presidential candidates [Kamala Harris and Donald Trump] is that both have populist, expansionary fiscal policies.”
There are, he added, differences at the micro level – whether in respect of the military industrial complex getting policy support or the Inflation Reduction Act’s clean energy subsidies – but at the macro level both are likely to favour increasing the sovereign debt.
“The similarities [between the candidates’ fiscal policies] are there; that’s what you need to factor into your investment decisions,” said Dafria, who oversees around £300 billion ($393 billion) of assets.
POTENTIAL ISSUANCE VOLATILITY
Similarly, Bariletti foresees an increase in government debt in the US – and the UK, for that matter -- over the next six to 12 months.
“[Both countries] need to raise a lot of additional cash, given their deficits,” she said. “And depending on how they time the market in terms of their issuance, that is going to create volatility, that, to a certain extent, may create some opportunity for us as investors.”
As of August, the US government was running a cumulative deficit of $1.9 trillion (based on outlays of $6.3 trillion and revenue of $4.4 trillion), according to the Bipartisan Policy Center.
As of 2023, the US deficit was 6.3% of GDP and its debt-to-GDP ratio was 121%.
US Treasuries are no longer the sanctuary they once were, remarked Kedi Huang, CIO of Aspen Insurance, on the same panel.
The firm takes the view there are no longer any safe-haven assets, he said, so it runs a multi-currency mandate to ensure diversification across regions.
INFLATION COMPLACENCY?
Rising fiscal spending has implications for inflation -- another key issue for Bariletti and Dafria.
Phoenix Group
From a geopolitical perspective, the idea that sustained interest rate hikes have brought inflation under control in various markets is a concern, said Bariletti, whose firm has £280 billion ($366 billion) in AUM.
“Because when you think about geopolitical risks and climate change, all the forces underpinning them are inflationary,” she added, citing issues such as disrupted supply chains and higher prices of commodities like energy and food.
For instance, the US’s Inflation Reduction Act, as has been widely pointed out, will arguably fuel inflation given that it is set to boost spending on renewable and clean energy technology.
Similarly, Dafria said: “We were worried about inflation before it started spiking. We remain worried about inflation after it has declined. Given where the long-term trends are, I think that’s one [issue] you have to worry about.”
CONFLICT IMPACT
As for ongoing conflicts in places like Gaza and Ukraine, Bariletti accepted that they had an impact on markets, but underlined the difficulty of making investment calls in respect of these situations.
She cited as an example the China-Taiwan tensions “boiling away in the background”.
“Due to the macroeconomic uncertainties and geopolitical risks, we remain quite cautious, defensively position and quite nimble in our portfolio management,” Bariletti said.
Both US presidential candidates also view China as the country's biggest rival, Dafria noted.
“How can we be better stress-test portfolios against those geopolitical shocks? The markets are notoriously inept at trying to price in low-priority, high-impact outcomes such as wars.”