No immediate storm ahead, but insurers should use the lull to build portfolio resilience

By Amaury Boyenval, Head of AXA Solutions & Relationship Management, AXA IM & Arnaud Lebreton, Head of AXA US & UK CRM and Deputy Head of AXA Relationship, Third Party Insurance Solutions, AXA IM

Original Content: AXA IM

Lingering COVID-19-related supply-side disruptions, alongside a significant rebound in consumer demand, are producing supply bottlenecks and an inflation rate not seen for decades. We expect 2022 to be a year of gradual absorption of the pandemic shock, with robust but less spectacular growth, while pressures on global supply gradually decline, contributing to a slowdown in inflation. A gradual convergence of ‘transitory’ inflation rates towards their target would allow central banks to remain prudent with the pace of monetary policy normalisation, making it digestible for investors as currently priced in to bond and equity markets.

This baseline outlook for 2022 is valid on the assumption that most economies continue to supress COVID-19 flare-ups and manage to remain open. It also presupposes a normalisation of the US employment participation rate in easing pressure on wages. There is still uncertainty on the impact of the pandemic on global economic trends, inflation dynamics, suggesting that investors should also plan for more adverse trajectories.

A worse outcome would be even higher inflation and a more aggressive than expected tightening of monetary policy. Additionally, a sharp rise in real yields would derail growth and earnings momentum and deliver a shock to bond and equity markets.

Transitory or not, inflation is back. Monetary policy is being adjusted while quantitative easing support is easing. In our central scenario, a modest increase in interest rates should allow investors to still enjoy decent returns, especially as they catch investment opportunities and follow capital flows allocated to the climate transition.

But market history shows that bouts of volatility are never far away. This has multiple implications for insurance companies, especially when considering the structure of their balance sheets and current developments in regulatory capital and accounting standards.

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