After a disappointing 2022, expect a ‘wild ride’ next year, says investment strategist

The year 2022 started out with so much promise in regard to market performance, but instead turned out to be “a disappointing year,” said Rich Sega, global chief investment strategist with Conning.

“And 2023 will be another wild ride,” he added at a recent webinar held by the American Council of Life Insurers.

Why did a year that began on such an optimistic note become such a disappointment? And what should we expect in 2023?

Sega said that much of the markets’ negative performance can be blamed on what he called “surprises.” The two biggest surprises were:

• The severe economic impact of China’s COVID-19 lockdowns, which may be lifted soon.
• The ongoing war in Ukraine, which has no resolution in sight.

Spending and energy policies cited

But what was not a surprise were fiscal and regulatory policies in the U.S., particularly regarding spending and energy policies, Sega said.

“We initially thought the U.S. economy would muddle through the year to a soft landing with modest inflation, despite these policies that weighed heavily on growth and propped up consumer prices, especially gasoline. But it didn’t happen that way. These policies plus those two big surprises proved to be too much for the economy and we find ourselves with skittish markets possibly peering into an economic abyss.”

Sega said recent International Monetary Fund projections showed a continued weakening across all regions of the globe. The IMF is calling for 2023 growth of 2.7%, down from their projection of 6% growth for 2022.

“But while growth has lagged, inflation has not,” he continued. Consumer price index inflation readings “remain stubbornly high. This is a global challenge.”

The path of S&P quarterly earnings “has been interesting” since the onset of global shutdowns from COVID-19 in 2020, Sega said. The S&P recovered in 2021 but has trending down ever since. Conning predicts 2% growth in the third quarter of 2022, which is the slowest earnings growth since 2020, but Q4 could go negative, he said.

The 2023 forecast calls for annualized growth of about 5% but downward revisions are possible, even likely, as a possible recession looms, Sega said.

“Recessions are bad for earnings. But they also provide opportunities for fundamental investors emphasizing selection over sector rotation,” he said.

“It starts with the economy, which drives corporate earnings, which supports market valuations. And 2023 will be another wild ride.”

Life/annuity outlook

The life insurance and annuity industry was another financial services sector that ended 2022 differently that what was predicted at the beginning of the year. Scott Hawkins, Conning’s head of insurance research, said the beginning of 2022 saw:

• Capital was strong.
• Life insurance and annuity sales had recovered from 2020.
• Profits were up.
• Things were getting back to normal.

Conning’s view at that time view then was “the industry was poised for growth,” Hawkins said. He pointed to the industry’s growth drivers for 2022:

• Demand for new products.
• Emerging coverage gaps.
• Economic growth – picture was positive in the beginning of 2022.

Another factor influencing Conning’s 2022 outlook, Hawkins said, was the impact that restructuring the industry’s competitive landscape had for insurers. That impact is being felt in insurers’ business models and distribution.

Although merger and acquisition activity slowed in 2022 compared with 2021, “We continue to see reinsurance transactions being announced, especially among annuity carriers.”

Sega said insurers are “shifting from being warehouses that develop and distribute product and then underwrite and hold risk to focusing on those parts of the value chain that generate the best growth opportunities for their particular company. This allows them to redeploy capital into those higher growth areas.”

But at the same time, he said, “The distribution landscape has also seen restructuring as M&A activity by aggregators is consolidating shelf space. But unlike insurance company M&A, distribution M&A in the first half of 2022 is ahead of 2021’s rate. This consolidation is a challenge to insurers because they now have to offer more competitively designed and priced products to gain and retain distribution shelf space.”

Despite Conning’s 2022 predictions, several issues impacted the industry this year and are expected to impact it in 2023, Sega said.

• Global unrest. Geopolitical unrest and COVID-19 are impacting global trade. In addition to Russia-Ukraine war, China’s COVID-19 lockdowns are disrupting the global supply chain, further contributing to inflation and weaker economic growth.

“Beyond these economic impacts, disruption is leading firms to reassess their exposure to geopolitical risk and whether they should think about reconfiguring their supply chains,” he said. “Some commentators have gone on to say we may be nearing the end of globalization. However, history suggests global trade has recovered from shocks to the system - be it war, economic crisis or pandemics. So it might be premature to call for an end to globalization.”

• While inflation is leading to higher expenses, the higher interest rates imposed to fight inflation “are proving to be a positive for insurers and consumers,” Sega said, citing higher crediting rates on universal life and fixed annuities.

• COVID-19 lingers. Long COVID-19 continues to challenge employees and drag on businesses, Sega said. He cited a Brookings Institute study that showed an estimated 3 million to 4 million Americans have long COVID-19, which represents a combined loss of anywhere from $170 billion to $230 billion in lost wages. In addition, disability insurance claims are increasing as long COVID-19 sufferers are turning to DI to replace lost income.

Several other issues are creating challenges as well as opportunities for the industry, Sega said.

• War for talent heats up. Life/annuity employment is beginning to recover in 2022, he said. “As long as unemployment remains low, the life and annuity industry will be in a war for talent.”

He predicted the industry will change its approach to hiring and retaining talent, with the industry responding to employees’ desire for flexibility, career development and diversity/inclusion.

• The fight over data usage. Sega predicted artificial intelligence will take over more routine functions and enable staff to focus more on their interactions with customers. But consumers and regulators “are expressing real concern over how that technology is being used and the potential to discriminate.”

• The impact of climate change. Climate change risks such as wildfires, floods and droughts may prompt policyholders to move to areas that are less effected by them, Sega said. In addition, global warming may lead to an increase in tropical diseases and higher death rates from heat-related illnesses. But the new green economy created in response to climate change is leading to increased investment opportunities.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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