Insight

Insurance Insights Q3 2022: Macro outlook and implications for asset markets

Insurance Insights Q3 2022:  Macro outlook and implications for asset markets

Markets have remained volatile as exemplified by the Bank of England (BOE) recently stepping into the gilt market to combat a severe liquidity squeeze.

I remain concerned that the dramatic market movements have highlighted the difficulties facing governments that need to stimulate growth at a time of high inflation and tightening monetary policy.

Still, I believe the risk of a major financial accident has been reduced in the short term, yet the focus will return to the still pressing macro challenges facing major economies.

The US remains in the best overall position of the major economies with the Fed facing the cleanest hiking path, as US inflation is increasingly led by domestic prices and wages. The Eurozone and UK still face an energy crisis, which will require diligent fiscal support.

Of course, much of Asia finds itself in a very different place regarding inflation and I doubt the Bank of Japan (BOJ) will tighten very much, while I think the People’s Bank of China (PBOC) will continue to ease on the margin.

Given the negative excess monetary growth and central bank quantitative tightening, I fear that asset returns will remain limited over the next 12 months.

It’s possible risk-taking will not be rewarded over the next year. I think equities could suffer a more dramatic slowdown in dividends as profits are squeezed. My best-in-class asset picks based on 12-month projected returns are alternatives such as real estate investment trusts (REITs), infrastructure, emerging market government bonds, and USD cash.

Alternatives such as REITs and infrastructure have reasonable yields and offer the best returns. I expect inflation to allow moderate growth in rentals and infrastructure revenues. Government debt has become more attractive due to the sharp rise in yields. The USD should continue to remain relatively strong given the Fed’s tightening path.     

Strategic investors and asset allocators can also look forward to a realignment of relative valuations across asset classes. Over the medium and longer term, we see opportunities arising from a well-diversified (and higher yielding) global portfolio, with exposure to equity, fixed income, and alternative asset classes.

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