Swiss Re looks for resilience, quality in high rate environment
The relatively high interest rate environment has proven itself to be stickier than first expected, and that is reshaping investment sentiment at Swiss Re Group.
“In an environment influenced by bumpy developments with inflation and macro volatility, we think that investing in high quality fixed income is more preferable to relatively riskier assets,” Chuan Lim, head of Asia and emerging markets investment strategy at Swiss Re Asset Management
Although around 85% of Swiss Re’s $110 billion portfolio is in fixed income, private credit is also looking attractive for several reasons, according to Lim. Therefore, the reinsurer will continue to build up its private debt capabilities, he told the audience at AsianInvestor’s Insurance Investment Briefing Hong Kong on March 19.
“Even now, we still think that there is some reward in terms of illiquidity premium to be had in the private debt sector. We continue to see opportunities in infrastructure loans, for example, which also ties in with our sort of ESG investments,” Lim said.
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After a rough three years for US treasuries which included the Covid pandemic and its aftermath, Swiss Re sees long-term higher yields as a positive change.
“We have continued to redeploy our cash and reinvest our coupons into US investment grade fixed income, with yields north of 5%,” Lim said.
He elaborated that Swiss Re’s base case for 2024 was relatively negative, with a recession in the US. Although the gradual disinflation trend might be bumpy, the reinsurer has been “pleasantly surprised by the strength of the US labour market” and has adjusted its outlook. The firm expects US growth to moderately slow down to a trend of 2%.
“Europe is going to do less well than the US, and China still has its challenges, but a lot of that is indexed in the price. In terms of the central banks, you know, we still will have the view that the Fed and ECB will start cutting, but it's going to be a very shallow easing cycle,” Lim said, referring to interest rate policy in the US and in Europe.
ESG FOCUS
In private debt, the firm’s infrastructure loan strategy is expected to grow. At the end of 2023, Swiss Re had about $1.2 billion in such investments.
“More generically in private debt, we tend to favour resilient business models with low leverage, because as we go into a weaker growth environment, they need to be resilient enough to service their debt,” Lim said.
Three main themes for infrastructure loans are digital infrastructure, healthcare, and decarbonisation, which all align with Swiss Re’s ESG efforts.
“ESG has been in much of debate lately, but we continue to believe that responsible investment is very important to us. From a risk management perspective as well, it also helps us to reduce the risk of being left with stranded assets,” Lim said.
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Swiss Re also sets carbon-intensity targets for its corporate bond and listed equity portfolios. Between 2018 and the end of 2023, the measure has come down by 45%, already exceeding the insurer’s 2024 target.
“We are quite light on equities investments because we think that the market is already pressing for a perfect soft landing,” Lim said. “But equities are also prone to a bit of correction, and we will be looking at opportunities to add when that happens."