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Roundtables & Panels

CAMRADATA: Insurance Roundtable

Where do we go from here?
Jenkins said it was really hard to say which way things were going to go. “Historically, we felt that central banks ‘had your back’ if economic growth dropped off a cliff. Now it’s vital to understand where inflation has come from and where locally it will persist.”

In this context, Jenkins mentioned bottlenecks coming out of Covid-19 and energy costs. But he also noted that central banks had been too loose for too long, especially whilst fiscal policy was also being eased during Covid. “Central Banks’ largesse may have seemed necessary at the time to soothe the economy. But now?”

Jenkins’ first concern was how high-interest rates will go. The second, more profound issue was how long they stay there. “Our big disagreement is with current pricing,” he said. “The US Fed is up to 4.5%, but markets are pricing in 3% in two years’ time. A growing fear we have is that inflation will be more persistent than currently priced in markets.”

Jenkins said there were now folk celebrating inflation rolling over at 8% as something to cheer about; and likewise its possible fall down to 4% over the next two years. “Is that moderation?” he queried.

As a remedy for inflation anxiety, Jenkins noted that TIPS offering more than a 1% real yield were one solution. He noted that equivalent UK linkers were offering 0%, albeit an improvement on the recent nadir of -2.8%.

Keen, however, queried whether even 1% was a good deal. With UK linkers down something like 30% year to date, he suggested inflation-linked swaps were a much more efficient means of protection.

Pistarino here noted organisational constraints. “There is a regulatory advantage in hedging inflation exposure,” he said. “Foresters doesn’t have the capability to do derivatives so we are pushed into sub-optimal assets like Inflation-linked gilts, locking in negative real rates. The alternative would be to actively deploy capital and allocate to risky assets with inflation-hedging attributes.”

Keen expected more of a risk premium in real yields to come, although he distinguished between the necessity of tactical moves over the next six to twelve months versus a longer outlook. “The investment horizon at Waverton is five years,” he said. “We don’t typically accept clients who don’t share that vision.”

Regarding the largesse of central banks and governments [which has finally caused trouble for the latest UK government], Keen described it as Pandora’s Box. “Consumers keep coming back for more. We have discovered the printing press.”

"Consumers are not panicking yet but are going to start leaning more on their credit facilities."

He saw this as part of the denial hitherto about inflation. “We are now in the catching-up phase,” Keen said. “Even folk at the ECB have said that the level of interest rates is nowhere near high enough. So rates are probably going to be higher than expected. That’s one reason why I am more cautious about the economy. Consumers are not panicking yet but are going to start leaning more on their credit facilities. So there will be a lot more duration in our funds with long-dated gilts call options on long bonds as a form of insurance.”

Keen agreed with Jenkins that for the insurance sector as investors, high-quality investment grade at a one-year duration could eke out a nice return.

“I’ve never been an inflationist; I’ve been bearish on bonds since the Global Financial Crisis, which has hurt at times,” admitted Keen. “But I’m now becoming more positive. I think inflation will come under control. It might not be nice, but the central banks have lots of assets to dump on markets.” His query was who would buy those gilts.