There is significant consensus among chief investment officers from around the globe that the late stage of the credit cycle has been entered into, according to research conducted by GSAM Insurance Asset Management.
Seventy-six per cent are expecting deterioration in credit quality – an increase from 33 per cent in 2015. In addition, more than half (57 per cent) thought credit spreads will moderately widen.
Interestingly, this trend was even more pronounced in Australia, with 90 per cent thinking we are in the late stage and 70 per cent expecting credit spreads to widen.
The fifth annual review into investment sentiments had participation from 276 chief investment officers and chief financial officers from the global insurance industry, with more than US$7 trillion in global balance sheet assets represented.
The research also found a marked increase in the number of chief investment officers believing investment opportunities are increasing. Last year only 9 per cent thought they would improve, compared with 29 per cent this year.
In Australia the optimism was even higher at 70 per cent.
Robert Goodman, managing director of GSAM Insurance Asset Management, said the optimism was relevant for how other institutional investors think about their opportunities.
“Insurers are optimistic not because rates are going up or that there is a host of new opportunities out there in terms of asset classes or strategies; in other words, they are not optimistic because things have dramatically improved in terms of the underlying data. They are optimistic because they have adjusted their expectations as to what they should expect going forward in terms of rate and performance generally,” Goodman said.
“Up until last year, many of the respondents felt we would potentially be going into a rising rate environment, and I now think people are more realistic that this is not the case.”
While optimism may have improved, return expectations have diminished. Forty per cent believe the S&P500 Index will give a negative return between -10 per cent and 0 per cent.
“For the first time since we began conducting the survey, insurers expect government and agency debt to be among the highest returning asset classes – an indication of the bearish sentiment and the continuation of quantitative easing programs,” the report states.
Specifically, 17 per cent of insurers expect private equity to be the highest returning asset class of the year. Twelve per cent think it will be government and agency debt; 10 per cent think it will be real estate equity.
High-yield debt causes a split, with 9 per cent thinking it will be the best class and 11 per cent thinking it will be the worst.
In terms of portfolio construction, the majority of chief investment officers plan to maintain their current level of portfolio risk.
“One-fourth of insurers plan to increase risk, while 16 per cent intend to reduce risk. EMEA-based insurers intend to add credit risk, while insurers in Asia Pacific plan to decrease equity risk and increase portfolio liquidity,” the report says.
The report concludes that the sustained low-rate environment has forced insurers to diversify into new asset classes and strategies, a feature it expects will remain even once rates rise.