Safeguarding clients and their businesses in the face of uncertainty
In today’s fast-paced economic landscape, navigating market trends and volatility is cru-cial for insurance and financial advisory professionals to make informed decisions.
FAnews recently spoke with Mike Adsetts, Global Chief Investment Officer of Momentum Multi-Manager, and Sanisha Packirisamy, Chief Economist at Momentum Investments, to provide a concise analysis and insights into current economic trends, market volatility, and investment opportunities tailored to professionals in the insurance sector.
Macroeconomic factors impacting investments
Packirisamy identified several macroeconomic factors that are likely to have a significant impact on insurance investments in the coming year.
“Market volatility, driven by unexpected geopolitical and market events, is a key concern, as it can trigger fluctuations across various asset classes. Regulatory changes also play a crucial role; the South African Reserve Bank’s Financial Stability Review from June 2024 highlighted how increased offshore prudential limits might affect domestic capital markets, potentially leading to a loss of depth and liquidity. Climate change is another major factor, causing periodic surges in weather-related claims, elevated reinsurance premiums, and higher consumer costs,” she said.
“Currency movements can further impact investment portfolios by altering their value. Despite a slower recovery compared to pre-COVID averages, the ongoing global economic recovery offers the potential for higher returns and lower credit risk. Persistent inflation, while easing from its peaks, remains above central bank targets in several regions and faces continued upside risks under a second Donald Trump administration, which can affect the real value of investments,” added Packirisamy.
Assessing the global economic environment
Her assessment of the current global economic environment reveals that, although global GDP growth has exceeded initial forecasts, it has slowed compared to 2023 levels and remains below pre-COVID averages.
“This slowdown is attributed to increased geo-economic fragmentation, geopolitical tensions, past monetary policy tightening, and lingering effects of the pandemic. The deceleration in growth is accompanied by persistent inflationary pressures. Upside risks in a geopolitically fragmented world, prone to protectionist tariffs, could limit the extent of easing in global interest rates. In such an environment, the inclusion of investment assets that hedge against inflation is advisable to protect the value of investments,” she said.
“Higher market volatility due to political instability, trade disruptions, and geopolitical tensions underscores the need for risk management strategies. Diversifying portfolios to include sustainable and alternative assets might offer additional growth opportunities,” she added.
Emerging market trends
According to Packirisamy, emerging market trends also present considerations for insurance professionals. “ESG (Environmental, Social, and Governance) compliance and sustainability are becoming increasingly vital in investment decisions. The rise of fintech and advances in financial technology are creating new investment opportunities. Additionally, there is growing interest in alternative investments that provide diversification benefits beyond traditional asset classes. Regulatory developments continue to impact market conditions, and staying informed about these changes is essential.”
Adsetts provided additional insights, noting that “climate risks have become a significant concern in the US, where wildfires and climate-related issues have made some areas in California either uninsurable or prohibitively expensive to insure. This development has substantial implications for the viability of certain insurance products and raises questions about the future need for reinsurance or government support. The risks associated with flooding, rising sea levels, severe weather, and geopolitical tensions must be carefully considered when evaluating severe and potentially uninsurable risks.”
Geopolitical risks also pose a threat to investments. Packirisamy highlighted several critical geopolitical risks, including deteriorating US-China trade relations, which could impact global markets through inflationary effects and disrupted supply chains. “Escalating tensions between Russia and Ukraine might adversely affect global energy markets and commodity prices. Aggravated tensions in the Middle East could lead to higher international oil prices. Additionally, the rise of populism could result in more nationalist policies, higher trade protectionism, and less coordinated global approaches to fiscal management, debt management, and climate change mitigation.”
Technological advancements and disruptions
In terms of technological advancements and disruptive innovations, Packirisamy pointed out that big data analytics provide deeper insights into market trends, economic indicators, and investor behaviour. “Enhanced tools for integrating ESG data into investment analysis are becoming increasingly significant.”
Adsetts added that viewing investments through a sustainability lens aligns with the long-term orientation inherent in the insurance industry, which often deals with life policies extending decades into the future. “The use of ESG factors is expected to increase as it serves as a risk mitigation tool and helps insulate clients from unforeseen events such as the recent COVID-19 pandemic. ESG considerations are vital across industries, allowing investors to make well-informed decisions by understanding risks and identifying areas for improvement. Investors have a fiduciary duty to use stewardship efforts to encourage companies to improve their sustainability practices.”
ESG on investment recommendations
Adsetts provided examples of how ESG factors have influenced investment recommendations within the insurance industry. “The need to address ESG issues at scale has highlighted the importance of collaborative versus competitive approaches. Initiatives like Climate Action 100+ and shared principles such as the UNPRI demonstrate the effectiveness of collaboration in addressing systemic issues. However, for specific investment decisions, individual assessments are crucial for benefiting both investors and markets.”
Packirisamy emphasised the importance of directing capital toward initiatives that support a greener economy and sustainable practices, engaging in shareholder activism to positively influence corporate behaviour, and assessing ESG risks alongside traditional financial metrics.
Adsetts also provided examples. “Some investment firms are opting out of financing future coal power generation stations due to their long-term negative impact on the climate. Firms are increasingly engaging with resource companies on climate mitigation strategies and targets, reflecting a growing commitment to sustainability. Assessing the insurance industry through an ESG lens involves examining corporate governance, climate strategy, transparency, and human capital efforts.”
Regulatory changes and developments
Regarding regulatory changes, Adsetts discussed upcoming developments insurance professionals should be aware of.
“Regulations such as Regulation 28 and CISCA set the rules for portfolio allocations, with recent changes including increased permissible offshore exposure and the introduction of the Two Pot System. As more assets are invested offshore, there will be a need for tighter integration between local and offshore portfolio components, with increased currency risk considerations. The Two Pot Retirement System will introduce a shorter-term need for liquidity as members access their “pre-funded” savings pot. This shift may require investors to reconsider portfolio approaches for these assets compared to more permanent savings. Over time, sustainability and climate change will increasingly feature in portfolios, with infrastructure investments playing a role in generating returns and fostering a sustainable environment,” he concluded.
Writer’s Thoughts
As insurance professionals navigate the complexities of today's economic landscape, it's essential to stay informed about the evolving macroeconomic factors, regulatory changes, and investment opportunities. By embracing risk management strategies, diversifying portfolios, and prioritising ESG considerations, advisers can make well-informed decisions to safeguard both their clients and their businesses in the face of uncertainty. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
