It could have been so much worse will probably be the prevailing reaction among insurance company and pension fund investment bosses as a turbulent year draws to its close.
There was no relief from the volatility that has now become embedded as the norm for the 2020s, writes Contributing Editor David Worsfold, but many of CIOs worst nightmares remained just that: nightmares. Few manifest themselves as reality.
Fears at the turn of the year that major economies, led by Germany, might lurch into recession and drag many others with them prompted some bold responses from governments. The willingness of the new German government to boost spending on major infrastructure projects and defence steadied its economy. By the end of the year Bundesbank President Joachim Nagel, when presenting the bank’s Forecast for Germany, was able to strike an optimistic note: “The German economy will make headway again in 2026: while progress will be subdued initially, it will then slowly pick up. Starting in the second quarter of 2026, economic growth will strengthen markedly, driven mainly by government spending and a resurgence in exports.”
Inflation risks have also receded, although by no means vanished. No investment manager will be discounting inflation but will be encouraged as the year ends with major central banks easing interest rates, albeit later and at a slower pace that some were hoping.
Trump's tariff tantrums
The other nightmare swirling around the investment departments of major institutional investors was the threat of a global trade war being sparked by President Donald Trump’s threatened assault on the world economy armed with brutal tariffs. Despite the clumsy gameshow hype of the so-called “Liberation Day” unveiling of some stinging tariffs on America’s trading partners this has not resulted in the chaos and global slump some feared. It may not be quite a damp squib but President Trump’s love of a deal has at least meant that, so far, its potentially catastrophic pyrotechnics have been contained.
These might be justified causes of that sense of relief but elsewhere dark clouds are still gathering.
Within portfolios there is an enhanced tension between the search for yield and looming illiquidity. This is not new but is being felt more acutely as governments press institutional investors to commit substantial funds to a wide range of infrastructure projects. These are notoriously illiquid and are joining the growing assortment of private credit assets in insurers’ portfolios.
This trend has not been viewed with total equanimity by regulators.
At the beginning of December, the International Association of Insurance Supervisors flagged it alongside geo-economic fragmentation and AI adoption as a key supervisory priority.
The European Insurance and Occupational Pensions Authority (EIOPA) similarly focused on private credit and the growing interest in a broad range of illiquid bonds in its end-of-year Financial Stability Report, noting both the trends and the vulnerabilities that could arise.
CIOs should consider their cards marked and will be preparing more rigorous rules on limits, concentrations and stress testing ready for when the regulators come calling.
ESG (Environmental, Social and Governance), once trumpeted with great glee as a key element of investment strategies, lost its shine during the year. It morphed into a less well-defined commitment to sustainability, aided by some rolling back of regulatory expectations, as pressure from right-wing and populaist politicans hostile to many initiatives that flow from ESG principles escalated.
Geo-politics casts its long shadow
Beyond these specific economic, financial and regulatory concerns there are the long shadows of geo-political instability. Once, issues that rarely merited more than a passing mention in the reports, publications and conferences that are the core sources of intelligence for investment chiefs are now inescapable. Scenario modelling has become the order of the day, nervously asking the “What if… “ question.
2025 could have been worse and the relief that it hasn’t been will be quietly toasted in investment departments across the insurance market.
- What will 2026 hold? Look out for the predictions of our panel of experts next month.