US business insurer FM Global plans to lift its allocation to Asia as it expands the non-US portion of its investment portfolio, a senior executive told AsianInvestor.
“We will [raise allocations] as there is a lot of potential across Asia,” Sanjay Chawla, CIO of FM Global, told AsianInvestor.
"While there are broadcasted geo-political risks in the region, we do believe that there are opportunities in Southeast Asian markets that can be approached cautiously.”
Chawla, who is based in the US, joined FM Global as CIO in March 2018 and is charged with overseeing the firm’s general account and pension assets.
FM Global is a leading US business insurer with a focus on property insurance, and has about $22.5 billion in invested assets at the end of December 2022, according to its 2022 annual report, released earlier this week.
The insurer has dedicated external strategies focused on Asian markets and countries.
Chawla noted that the insurer’s interest in Asia investments has grown in recent years.
“We have historically focused on developed markets with a concentration in the US, but in the last five years, we have evolved our allocation from 5% to 12-15% non-US,” said Chawla.
“This includes Asia, which we expect to be front and center of any global growth trend, as it emerges cyclically and/or structurally.”
Strategic asset allocations are made across five asset classes: equities, fixed income, alternatives, multi-assets, and cash and cash equivalents.
The equities allocation includes U.S. and international equities, while fixed income allocation includes long duration and opportunistic strategies.
The alternatives asset allocation includes absolute return and private investments.
Chawla noted that markets outside the US have evolved since the time of the BRICS – a reference to the acronym grouping Brazil, Russia, India, China and South Africa.
“India and China are now at the forefront of the global economy, and India is stepping up following….. global disruptions,” he noted.
FM Global is not alone in that sentiment: other global pension funds and sovereign wealth funds have told AsianInvestor that India has become a favoured investment destination in recent months.
India’s population is also estimated to have surpassed that of mainland China, according to recent estimates, presenting the opportuntity for a demographic dividend - the ability, in theory, to improve economic growth potential as a result of a growing working population and per capita income.
Chawla said he saw several compelling and differentiated opportunities in Asia from a regional viewpoint.
“An important innovation-led ecosystem has emerged in Singapore and there is good momentum on innovation brewing in India,” he said.
“While India has its risks, and the Indian market has a tendency to become overly optimistic and get ahead of itself, we do believe that being diligent and selective will deliver outperformance in the long run.
"While the [Indian] currency has a natural depreciation embedded in its outlook, the track record is of very marginal, gradual local currency depreciation.”
Opportunities are also available in other high-growth emerging markets, such as Indonesia, Vietnam and the Philippines, he said.
He noted that Japan could also provide another positive surprise as global markets rebalance to find a new point of equilibrium.
“As much as we want to be optimistic about Latin America, we see a more vibrant opportunity set in Asia, given more stable local political conditions.”
The insurer emphasised it remains selective about the opportunities in the region, and does not want to paint Asia and emerging markets with the same brush.
Overall, the the long-term opportunity is broader in emerging markets, given the valuations compared to developed markets, and FM Global will continue to look for additional opportunities, Chawla said.
BRACED FOR VOLATILITY
Overall, 2023 is set up for persistent market volatility, according to FM Global.
“Interest rates have gone up and are potentially nearing their peak levels, while rates are expected to stay higher for longer, making fixed income a more attractive investment opportunity this year.
With risk-free assets earning about 5% as a baseline, investors are likely to demand higher returns from risk assets such as equities.
Typically the 3-month treasury bill is considered as a risk-free asset in the US -- the instrument is currently trading around 4.95% to 5%.
Equities now have a higher bar to clear, with a required return of about 5%, as the US risk-free rate plus an acceptable risk premium, said Chawla.
Last year, there were significant market disruptions from the start of the year, and with high valuations and rising interest rates, there were limited options from an investability standpoint, he said.
“This year, the investment opportunity set has reset, providing a broader range of return generating investment options.
"There is a risk to markets with persistently higher inflation, but my sense is that given the drawdowns observed in various traditional asset classes last year, these investments will perform better in 2023, as will liquid alternatives, which were valuable diversifying strategies last year as well.”