Insurance Insights Q4 2023: Investors look to fixed income and alternative assets

Despite several quarters of restrictive monetary policy, the global economy — particularly in the US — has remained remarkably resilient. Still, we think the global economy is entering a brief period of below-trend growth driven by recent monetary policy tightening, which we believe markets have already partially priced in.

Because the global economy continues to decelerate, it makes sense to continue to maintain a defensive posture. Markets could be entering a period of consolidation among cyclical assets and higher for longer interest rates could pressure equities. We believe transitioning from uncertainty in inflation to uncertainty in growth will favor high quality and duration sensitive assets.           

Even though long duration US government bonds and USD cash deposits are generating healthy yields, investors may consider other fixed income assets that could add diversity and potentially higher returns to a neutral asset allocation portfolio, such investment grade bonds, US bank loans and private credit. 

The recent rise in interest rates have propelled bank loans yields and we think they offer better value than high yield (HY) bonds. The bank loans asset class has a cyclical element due to the risk of defaults – our projections show that high current yields offer sufficient compensation for the default risk that we envisage. Once central banks start to cut rates, then HY bonds would become more attractive. 

Alternative investments such as private credit are also appealing in a high interest rate environment. Historically, on an unlevered basis, yields for this asset class ranged from 7.5 to 8.0%¹ but over the course of the last 18 months, interest rates have trudged upwards and today, the unlevered yields for direct lending asset class generally range from 12-13%.²