This time last year, predictions of what 2022 might hold in store were laced with fervent hopes that we were on a return path to normality. Instead, we were hurled through a year of disruption unparalleled in modern times.
Predicting the direction markets could take in 2023 might feel like a game for the foolhardy but a selection of market experts and commentators have still been brave enough to offer their thoughts on what lies in wait for us in 2023. Here are some of their insights, together with a few of my own, writes David Worsfold.
Unsurprsingly, there are few consistent themes and little consensus beyond that inflation will remain stubbornly high, along with interest rates.
Our pundits
Frank Eich (FE) Consultant on economics, financial markets and sustainability and former senior advisor to the Bank of England
Con Keating (CK) Head of Research, Brighton Rock Group
Andrew Torrance (AT) Chair, Insurance Non-Executive Directors Forum and Tokio Marine Kiln Syndicates. Former chief executive of Allianz Insurance plc
Erik Vynckier (EV) Board Member, Foresters Friendly Society & Chair of the Institute and Faculty of Actuaries (Research & Thought Leadership Board)
David Worsfold (DW) freelance financial journalist and contributing editor to Insurance Investment Exchange
- In one word sum up 2022!
CK Brutal
AT Shocks!
FE Terrible
DW Chilling
- Geo-political volatility disrupted financial markets in 2022 to an extent not experienced for almost 50 years. Looking forward to 2023 how should insurers position their investment portfolios in the face of these pressures?
CK About the only winners from the geo-political instability are the defence companies. With inflation likely to prove very sticky, inflation linked infrastructure should prove attractive. The keyword for the coming year is liquidity – insurers should be hoarding it.
AT The rapid rise in interest rates seen in 2022 means insurers can now invest in bonds at interest rates they could only dream of a year ago. This means there’s no need to chase yields in 2023 and an opportunity to position portfolios a little more conservatively in the face of recessionary pressures.
DW They need to absorb the new reality that geo-politics – especially nationalism – has displaced trade and globalisation as the major force in world. Are portfolios positioned to cope with the next major geo-political shock, which could easily involve China? This all points to more conservative, defensive strategies but sprinkled with careful targeting of markets and sectors that offer stability, even growth. Re-building Ukraine, defence industries (once thought unfashionable), restructured energy markets – all offer medium to long term potential.
- Amid all the uncertainty what is the biggest challenge for insurers and their investment portfolios?
CK Not to be sucked into false rallies in bond yields and equity prices arising from mistaken beliefs that inflation has been tamed.
AT Taking a view on what central banks will be doing on interest rates to control inflation.
EV The biggest challenge for insurers is their own inflexibility in investing. Processes at insurance companies are designed in a way that misses the boat on virtually all emerging opportunities.
DW In the UK, continued nervousness about the direction of government policy still has the potential to destabilise markets so looking beyond the short-termism of government policy will be essential.
- Inflation: last year the talk was about whether it was transitory or becoming embedded. How does it look now?
FE It should start falling soon. But: that means the price level will remain high. Change vs levels, often forgotten...
CK It is now embedded and likely to prove extremely difficult to get below 6% in the US and UK.
AT For me, the current central bank projections on inflation still look too optimistic. I am in the higher for longer camp.
EV 2022 saw the succession of the excuses: “transitory” inflation; “energy” inflation, but not core … before central banks admitted to actual inflation. Not only does that lazy narrative ignore the reality of inflation hitting producers’ margins and stretching consumers’ purses, but it also ignores inflation’s origin, characteristics and what could abate inflation.
DW The rate should ease back a little but will remain high. As far as household and business budgets are concerned the damage has been done and the corrosive effects will continue. It will need more than interest rate rises and narrow monetary policy solutions to tame it, especially in the UK.
- What are your predictions for interest rates in 2023?
FE Up a bit more and then keeping stable.
CK Ten year US 5.00%– 5.25% UK 5.50% - 5.75%. Twenty year US 5.50% - 5.75% UK 6.00% - 6.50%.
AT Central banks will continue to raise rates in the first part of 2023 and will then need to hold them at these elevated levels for the rest of the year to squeeze inflation out of the system.
EV Higher nominal interest rates (but depressingly low real interest rates) have reset the calibration between public debt and private debt. For the first time in around 15 years, public debt might offer some attractive opportunities in high yield, investment grade and even some sovereigns – once central banks stop hiking or possibly lower policy rates again in response to signs of unemployment.
DW Stability but at a level that will seem high to many, moderate to those with long memories and attractive those wanting to save but not risk the equity markets.
- ESG and climate change: have insurers got the right strategies in place? How should they respond?
CK These are issues for the back burner in what looks to be a very difficult year.
AT I believe the industry is positioning itself sensibly on climate change from an investment perspective. There has to be a managed transition to net zero and that is what the industry is looking to support.
EV Are we investing in an ESG bubble? Is the regulator pushing all companies down one and the same road, which is being trotted down without care? Are we politically motivated to junk our balance sheets in superficially attractive, but financially extremely risky clump investments in unproven sectors and unproven technology, which are failing us already today, even before the "ESG revolution" is complete? Is the next global financial crisis going to be the outcome of the uncritical investment in greenwash?
DW ESG is too much of a pick and mix concept, enabling everyone to say they have an ESG strategy in place. It is already in danger of becoming meaningless as few businesses or investment strategies genuinely aspire to tick all ‘E’, ‘S’ & ‘G’ boxes.
- Regulatory relaxation in the UK has been framed as stimulating investment into infrastructure. How will this play out in insurer portfolios?
CK There really is no supply within the UK.
AT Minimal impact for P&C portfolios.
EV The relaxation is not bold enough. It will just compress spreads to be earned in the already mediocre, low spread UK infrastructure debt.
DW More hype and hope than substance. Only a proportion of the capital expected to be liberated will find its way into infrastructure. The trap for insurers will be collectively trying to earn worthless political brownie points by investing in vanity projects favoured by the government. There will be opportunities to lock in decent long term returns but they are likely to be in less glamorous, lower profile projects.
- In five or fewer words sum up your hopes, expectations or fears for 2023?
CK A dull and dismal year of falling living standards, persistent inflation and prolonged recessionary forces. (I know that is not five!)
AT More volatility but attractive returns.
FE I hope the war ends soon.
EV Growth is elsewhere: follow the extended BRICS.
DW Hope for stability. Fear instability.
- Next week we take a controversial deep dive into the shortcomings of ESG strategies and policies with Erik Vynckier.