Goldman Survey Finds Insurance Execs Upbeat About Markets, Wary of Political Risks

A survey of global insurance industry CIOs and CFOs conducted by Goldman Sachs Asset Management (GSAM) has found that their primary concerns focus on achieving adequate returns, managing political uncertainty, an economic slowdown, and market volatility. The respondents also said they expect private equity to deliver the highest returns, while they are “generally less pessimistic” about global investment opportunities.

The survey, “A Reversal in Expectations,” received more than 300 responses from CIOs and CFOs insurance executives representing more than $10 trillion in global assets.

The survey found “a dramatic turn” in the smaller number (33%) of respondents who believed the world economy is in the late stage of the credit cycle compared to 75% of respondents last year. This means more insurance executives believe the global economy is growing slower than expected, so executives are expect greater political uncertainty accompanied by low interest rates.

Yet even with these caveats, insurers are decidedly more optimistic than in preceding years, with 88% of respondents saying that the S&P Index will be higher in 2017 than last year, when half of insurers said the index return would be negative. Overall optimism also translated into a greater appetite for equity and credit risk.

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According to Michael Siegel, GSAM’s Global Head of Insurance Asset Management, “the survey clearly points to a favorable view on the global economy and optimism for higher equity prices and higher interest rates. This optimism is translating into greater risk taking in equities, less liquid assets, and in particular, fixed income credit.”

The global survey also found regional differences in responses. For example, different parts of the world are making different asset allocation decisions due to such factors as increases in government and infrastructure spending. This is why nearly one-third of US and European insurers anticipate increasing their allocation to infrastructure debt. Over half (57%) of Asia Pacific-based insurers intend to increase their allocation to US investment grade corporates, up from 45% last year. Insurers in the US and Europe also are showing more interest in commercial mortgage loans, which may become a larger portion of their portfolios.

Collectively, the survey also found that::

More than 80% of insurers anticipate an increase in 10-year US Treasury yields, and 88% of insurers believe S&P 500 Index returns will be positive in 2017.
Only 2% of the respondents said credit spreads “will widen significantly” this year. The “backpedaling” view on the credit cycle has seen an increase in corporate credit allocations, with a 33% of insurers planning to increase their exposure to credit risk.
Brent crude oil prices are anticipated to be range bound between $50 and $75.

Tags: credit cycle, Goldman Sachs Asset Management, insurance industry

Institutional investors are looking to commit $62 billion in new capital to commercial real estate investments in 2017, according to a survey by Kingsley Associates and Institutional Real Estate. This is an average reduction of 19% to their investments in this asset category compared to 2016.

“The decline in new capital flows can be largely attributed to two primary factors,” according to Jim Woidat, a principal at Kingsley Associates. “US survey respondents reported real estate holdings exceeding their target allocations to real estate, which reduces the need for new capital commitments. In addition, investors report a significant uncalled capital overhang of $47 billion, which also limits the need for new capital deployment.”

Most US investors however—72%–are still actively looking for new real estate investments in 2017. They are most interested in industrial properties, as a result of demand from the growth of e-commerce, with multifamily coming in second. Third on their list is the self-storage property type, followed by senior housing and student housing, while they are less enthusiastic about office, medical office and retail properties.

They also expect to deploy the most amounts of new real estate investment capital into “core properties”, at 33%, and “value-added properties”, at 27%. And they are slating 20% of the capital to opportunistic investments, 8% to debt products, 7% to foreign investments, and 5% to real estate securities.

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Geographically, the US remains the number one draw for both US and foreign real-estate investors. US investors saw the most drop off in interest for the United Kingdom and Northern Europe, as a result of concerns about Brexit and the overall stability of the European Union. And both US and foreign investors view Russia as the least-attractive region for new investments, based on geopolitical concerns.

“Real estate investors have enjoyed healthy returns post-global financial crisis, but it’s evident from the survey that they are showing more caution at this point in the cycle,” notes Geoffrey Dohrmann, president and CEO of Institutional Real Estate. “US investors dialed back their total return expectations for real estate from 8.7% last year to 7.4% for this year. However, on a risk-adjusted basis, respondents ranked real estate as the most-attractive asset class for the seventh consecutive year.”

About half of the US investors, at 49%, reported that real estate had exceeded their expectations for 2016, the best performance of all asset classes, which explains their continued interest in this asset category.

Respondents to the IREI survey include 113 US institutional investors and 51 foreign investors, representing a total of $741 billion in real estate assets.

Tags: industrial properties, Kingsley Associates and Institutional Real Estate, Real Estate