Some insurers in Europe see investment opportunities in Asian bonds in the wake of Covid-19, but others say they are put off by Asian currencies having weakened against the euro. Private equity is another major area of focus in the fallout from the pandemic.

Karl Chappell, director of asset management at the UK’s Resolution Life Group, said he sees a chance for opportunistic investment in the coming months into Asian credit markets. The insurer had been relatively lightly invested in such assets over the last two years owing to narrowing spreads. 

“Looking ahead [the market] will be very volatile,” Chappell said, speaking on Monday (September 14) at a virtual conference on managing assets for insurers hosted by the Financial Times.

The insurer, which manages legacy life portfolios, has been concentrating its global bond investing on higher-yielding debt globally, especially through actively managed mandates, he added.

Nicolas Moreau, HSBC

Nicolas Moreau, chief executive of HSBC Global Asset Management, said he sees large opportunities in Asian junk bonds. Current yields overestimate the likelihood of future defaults in a region that had weathered the crisis relatively well, he argued during a separate session at the FT event.

However, Jose Luis Jimenez, CIO of Spanish insurer Mapfre, said Asian currency weakening against the euro was limiting his firm’s appetite for Asian assets.

Investment gains in Asia may be cancelled out by Asian currencies, especially those pegged to the US dollar, weakening against the euro, he noted during the same event. The greenback has fallen 10% against the European single currency since March 20, and other Asian currencies have weakened too; for instance, the yen has dropped 11% against the euro since May 6.

“Even if you get a 5% or 8% return in local currency,” said Jimenez, “it doesn’t make sense to do such an investment if you are going to lose by the currency effect.”

That said, he sees some opportunity in Japan, pointing to the $6 billion investment into some of the country's largest financial groups by famed allocator Warren Buffett in August as evidence of interest in the country. “And if Japan does well we can see the effect coming across the Pacific rim,” Jimenez said.

PRIVATE EQUITY PUSH

As for other asset classes, Resolution Life is invested in Asian private equity funds as part of its wider allocation, he added. It has made considerable commitments to the asset class over the last two years he said, much of which managers had not yet drawn down.

Jose Luis Jimenez, Mapfre

Mapfre has also been adding exposure to private equity, especially in the secondary market and in niche sectors, funding the allocations with maturing sovereign bonds. “Thanks to the crisis, we are seeing better prices to jump in [at],” he said.

The insurer is also increasing its allocations to commercial real estate, especially offices, in the US and Europe – although not in Asia - to take advantage of cheap prices from forced sellers.

This is despite widespread investor concerns that the office property sector will suffer as many workers end up working from home more post-pandemic and companies consequently need less square footage. 

“Big companies and HNWIs have been forced to sell to create liquidity, something already seen in some markets” Jimenez said, adding that this could be to pay back debt or restructure businesses.

He said he was confident of returns of 2.5% to 3% in prime locations in the main European cities, which are particularly attractive locations for Mapfre because its liabilities are in euros. Jimenez expects such opportunities to emerge by the first half of 2021.

This article has been updated to clarify that Resolution Life is interested in Asian investment grade bonds. It does not invest in high yield debt.