Cathay Life is carefully identifying investment targets as it considers assets that could outperform in a post-Covid-19 world.

The NT$6.41 trillion ($212.74 billion) fund raised its cash position in the second-half of 2019 after high asset values prompted the Taiwanese insurer to de-risk its portfolio.

"The Covid-19 pandemic has pushed the world into recession. Cathay Life will keep an eye on the impact of Covid-19 and will also think what a post Covid-19 world would look like,” a company spokesman told AsianInvestor. 

The insurer has been focusing on “building portfolio resilience and conducting investment analysis to identify investment targets with superior fundamentals,” the spokesman said, adding that “when core high-quality assets are oversold and offer value, we plan to capture the opportunities promptly.” 

When core high-quality assets are oversold and offer value, we plan to capture the opportunities 

The insurer also said it is closely monitoring the durations of lockdowns and the effectiveness of central banks’ stimulus on the global economy and businesses that have been affected by the virus.

"We have always been able to seek out investment opportunities while navigating volatile markets to ensure that we balance return and risk," he said.

Cathay Life said last month it was planning to increase its allocation to domestic equities when the market saw a massive sell off. This is despite having cut its exposure to stocks in the later months of last year.

“In the second-half of 2019, Cathay Life saw rising uncertainties of a late-cycle economy and the risk of elevated asset valuations. We gradually decreased our risky assets, increased high-quality credit, and raised our cash position to prepare for higher volatility in the financial markets,” the spokesman further elaborated this time.

ROBUST CAPITAL POSITION

Unlike smaller insurers, Cathay Life will likely see limited impact from recent huge swings in the market. In December 2019, Cathay Financial Holdings completed a NT$10 billion capital injection to Cathay Life to strengthen its capital buffer and financial flexibility. As of the end of 2019, Cathay Life’s RBC (risk-based capital) ratio stood at 346% and its net worth ratio was at 9.6%, both of which are stronger than its peers.

With enhanced asset quality and a strong capital position, market volatility will provide Cathay Life buying opportunities for core assets. In contrast, current market conditions will only worsen the inferior risk-based capital levels of Taiwan’s smaller insurers, leaving them with no excess capital to invest in cheaper assets.

Taiwan’s equity market as measured by the Taiwan Stock Exchange Weighted Index has dropped as much as 25% in the first quarter. It later recovered and is now down about 15% so far this year. Meanwhile, the yield from investment grade and high-yield debt has also been going down. 

“As a result, it’s very much expected that insurers’ RBC levels will drop a lot too. That brings a lot of pressure for the lower end of insurers,” said a Taiwanese institutional coverage expert at an international fund house.

MARKET RECOVERY

Cathay Life wasn’t the only fund that had the foresight to sell off risky assets. Australia’s Future Fund started to de-risk its portfolio in early January when most market participants did not expect the coronavirus outbreak to evolve to such an extent that it pushed the world into a global recession.

Asset owners in the region began carefully assessing investment risks and market developments following severe market volatility caused by the coronavirus outbreak and news that the world's crude oil supply was set to increase markedly.

Looking forward, experts are divided whether the stock market will see a V-shaped, U-shaped, or W-shaped recovery.

Emerging markets investing guru Mark Mobius is more inclined to a W-shaped recovery, in which shares might drop to the low levels seen in March before finally proceeding back to the previous highs.

The world economy will bounce back from the Covid-19 pandemic, but investors will see the potential for another round of pain, Mobius said. That might offer another round of opportunities for institutional investors like Cathay Life to achieve higher returns over the long term, should they are keeping enough cash in hand.