Invesco’s latest insurance outlook, from Charles Moussier (pictured above), head of EMEA insurance client solutions, anticipates that easing monetary policy and financial conditions will support global economic and market growth in 2025.
The firm’s baseline projection sees global growth continuing, with a 15% probability of a recession scenario.
In the United States, the recent Republican electoral victory is expected to maintain a loose fiscal stance, potentially raising long-term growth and inflation expectations. This has already exerted pressure on longer-term Treasury rates, and further volatility may follow as fiscal policy details emerge.
Fiscal expansion is likely to weigh on longer-dated Treasuries, while shorter to medium-term maturities may benefit from the Federal Reserve’s easing measures. Moussier said that even if rate cuts are delayed, current yields provide substantial income generation and some protection against rate risks.
In the eurozone, the European Central Bank (ECB) has initiated a rate-cutting cycle, prompted by evidence of slowing economic activity. Policy rates remain above neutral, and further cuts are anticipated over the next 12 to 24 months. US tariff threats could affect eurozone exports and growth, potentially boosting demand for European bonds, according to Moussier.
The UK economy, while marginally improved from the previous year, continues to experience low growth. Inflation is easing as wage pressures diminish, but fiscal concerns stemming from recent budget announcements have kept UK bond performance between that of Europe and the US. The Bank of England is perceived as responding cautiously to broader economic challenges.
In financial markets, easing monetary policy and solid growth fundamentals provide support, though tight valuations remain a constraint. Invesco’s Global Tactical Allocation Model reflects an underweight position in risk assets relative to benchmarks.
Equities are underweighted in favour of fixed income, with a preference for US equities and defensive sectors. Moussier notes that within fixed income, there is an overweight position in investment-grade credit and sovereign bonds, offset by reduced exposure to lower-quality credit.
Fixed income remains a cornerstone for insurance portfolios. Insurers are expected to favour government bonds over corporate bonds for duration extension while seeking additional income from private credit. Invesco expects yield curves to steepen, with central bank rate cuts supporting short-term rates and increased issuance affecting long-term rates.
Emerging markets could gain appeal, though geopolitical risks necessitate selectivity. Flexible fixed income strategies are highlighted as key for capitalising on relative value opportunities.
In speculative-grade credit, senior secured loans are preferred over high-yield bonds due to their superior yields and credit enhancement features. Loans, secured by company assets, mitigate downside risk while offering attractive income opportunities.
Within private credit, Moussier advised insurers to focus on the upper middle market, where larger, more stable companies provide greater resilience.
Invesco expects private credit deal activity to increase, driven by current market conditions. Distressed and special situations debt are expected to offer improved opportunities, providing capital efficiency benefits over private equity. Commercial real estate debt is projected to remain attractive, supported by improved credit quality and an array of investment opportunities.
For private equity allocations, selectivity is emphasised. Strategies heavily reliant on leverage may underperform in the current interest rate environment. Growth equity and expansion capital strategies are identified as favourable options.
Invesco identifies disinflation and the associated decline in interest rates as potential risks to insurers’ business models. A cautious stance is recommended, with diversification across private markets via semi-liquid credit instruments such as senior secured loans and real estate loans. These assets are seen as complementary to government bonds, providing a buffer against market volatility.
What are your thoughts on this story? Please feel free to share your comments below.
