The most repeated point during the panel on "Market Outlook and Investment strategy for Insurance Companies" at the 2018 Asian Actuarial Conference was to diversify. "There is no need to concentrate on what you think will work well as there will be surprises down the line," said Conning Asia Pacific's senior portfolio manager, Marc Franklin. Due to the flat interest rates, especially in Japan, he sees an increasing volatility in financial assets.
Going back further into the past, ten years ago was the time to buy, said Aberdeen Standard Investment’s head of investment specialists – Asia Pacific, Donald Amstad. “From an investment standpoint, it was a very dangerous time to be taking risk. And as there has been a massive search for income globally, as yields on risk-bringing assets have fallen, many companies have been taking a lot of risk that they frankly probably don’t understand to try and generate the returns they promised their shareholders or policyholders.”
Diversification is key, he repeated, as we are still in a very dangerous time. “It’s impossible for anyone to say with any confidence what will happen next because we have never been in this position. We have never seen this massive inflation of central bank balance sheets, and potentially, the reversal of that inflation of balance sheets.”
The one positive he said, that insurers could take from some of the market developments this year, is the return of volatility. “Volatility is supposed to be our friend – and indeed it is as it creates opportunity,” he said.
He also brought up three possible risks that a company could take in today’s market environment to generate income – currency risk, credit risk and duration risk. “I am very wary of people who claim they can take currency risk because the amount of people who can do that very successfully over a long term is very low,” he said, while pointing out that the risks involved in duration risk is currently incredibly high.
And while there have been some interesting developments in certain markets this year, credit risk must still be approached carefully. “As investors, credit risk is something we feel we can control. If you do your bottom-up research, and if you have a strict quality approach, then I can be comfortable dealing in credit markets,” he said.
“The good news is that in emerging markets and to a certain extent, Asian credit markets, we’ve seen a great widening in credit rates this year, especially over the last couple of months, and for the diligent investor there is going to be a lot of opportunity there.”
The Asian Actuarial Conference was held in Hong Kong for the first time in 17 years and is host to almost 700 actuaries and other insurance professionals. The four-day conference ends today.