November Seminar: Waiting for Normalisation
The return to more conventional monetary policies and the continued search for yield are going to be the dominant themes for 2018, according to the panelists at the recent Insurance Investment Exchange seminar.
Taking its cue from the title of the event, Ghosts of Christmas past, present and future, the half day seminar tackled the challenges facing insurers through three panel sessions: the first looking to draw out lessons from the past year, the second examining today and the final session looking into 2018 and beyond.
The context was set by the event chairman Paul Abberley, chief executive of Charles Stanley, who said rising populism in the West and potential instability in the Far East would normally be precursors of major volatility in financial markets.
“There is now almost a disconnect between these big geopolitical concerns and the behavior of equity and bond markets. They have carried on almost undisturbed”.
Con Keating from Brighton Rock felt this disconnect could be largely put down to quantitative easing which had fuelled the most sustained rally in bond yields since the 14th century. This was going to come to an end but not quickly.
“We are on the path to normalisation but the US Fed’s map suggests that the progress will be glacial. They are terrified of the consequences of another taper tantrum”.
He cautioned the audience to look to exchange rates as a significant source of disruption: “There is the potential for a run on the pound if Labour is elected but Brexit will be far more important. What will be dominant in a post-Brexit world will be the exchange rate because we will no longer be in control of how the world interacts with us”.
Bob Swarup, co-founder of the Insurance Investment Exchange, picked up the Brexit issues.
“Brexit is heading for a shambles. March 2019 is not an end date in itself, but merely the start of a longer term upheaval where we will see endless summits to sort out who pays for what and when. This will shorten policy-making timescales and we will all work within shorter horizons”.
He also agreed that we will see a degree of normalisation of monetary policy but that this will move very slowly: “There is a sense of normalisation but there is a danger of that turning into complacency. It has almost become like ‘Waiting for Godot’ where the main character never arrives”.
Another ghost created by the financial crisis is inequality which could come back to haunt the financial sector warned Keating: “Income inequality can only be solved by reducing the return on capital. The current feel good factor has been achieved by people taking on more debt and that serving as a substitute for real wages. That cannot go on for ever”.
Swarup agreed this was an issue that politicians were growing anxious to address and it would have consequences: “The next generation of bail-outs will be direct to society rather than to financial institutions”.
The panel tackling Christmas present focused on the credit cycle with Gareth Quantrill from RSA Group saying he was cautious about 2018: “We could be near the end of the cycle. We are seeing valuations that are not attractive, and I have a real concern that dealer capacity in markets could be reduced if the market turns”.
“Varying cycles, all moving differently” is how M&G Investments’ Will Nicoll summed-up his view of the credit cycle.
“It is quite hard to see an end to the growth because there isn’t an obvious trigger as there was in 2005/2006. We have sensible values and sensible disciplines in most parts of the market”.
He was not complacent, however: “We will hit a lot of air pockets as QE is reduced. The sell-off could start with high yield and then we will get a credit tantrum rather than a taper tantrum”.
Being prepared for the potential consequences of a bumpy end to the current favourable credit cycle is essential, said Erik Vynckier from Foresters Friendly Society.
“We have to plan ahead in detail just how you are going to access liquidity in a distressed market. You want people to understand what they are investing in and understand liquidity”.
Nicoll agreed this should be a major concern.
“Two years ago the FCA, the Bank of England and everybody else was talking about the threat of a lack of liquidity if there is a market sell-off. We all seem to have got bored with that, but it still has to be a major concern”.
Looking to the future was the tough task set for the final panel of the morning.
There will still be opportunities to find assets producing good returns but these will often be in specialist markets, said Daniel Schrupp of Camdor Global.
“The strategic priority is still the hunt for yield and the pressure is still on insurers to make money. The ability of insurers to look at their investment function as a competitive advantage will become really important”. He highlighted SME lending, trade credit and the UK housing market as having potential for above average returns but said it would be important to access the right expertise and have an informed conversation with regulators before moving into these asset classes.
Pool Re’s chief investment officer Ian Coulman felt that a relatively stable year was in prospect with decent returns to be had, especially from riskier assets. He saw a gradual trend towards normalisation which he characterised as “quantitative tightening”. The cloud on the horizon was that “markets do seem to be dismissing the geo-political risks”.
Ladislas Smia, co-head of the responsible investment research department of Mirova, part of Natixis, focused on what he saw as the growing opportunities around sustainable finance.
“More and more stakeholders are going to expect insurers to look at ESG [environmental, social and governance] and sustainability. The financial sector as whole has been behind the curve on this key challenge. It is about how you invest, how you manage your own carbon footprint and engage with the wider international agendas”.
Coulman agreed: “There is more that can be done. You can put forward investments that have the prospect of making a profit but also have a clear public benefit. We should be looking at investments that make UK plc more resilient”.
ESG was the topic of one of the breakout sessions led by Smia. The other breakout examined trends in real estate debt and was led by M&G Investments.
The next Insurance Investment Exchange half-day seminar takes place on 7 March 2018 at Skinners’ Hall. You can register your interest for this and our other events by clicking here.Category: Commentary