Goldman Sachs asset management survey finds ‘cautious optimism’

It’s been a tough couple of years for asset managers and insurance companies, some of whom have struggled just to stay even. But things might be changing, and the storm clouds could be parting. A major survey of 359 CIOs and CFOs, representing more than $13 trillion in global balance sheet assets, by Goldman Sachs, indicated some “cautious optimism” and positivity for a change.

The 13th annual Goldman Sachs Asset Management Global Insurance Survey found respondents eager to put last year in the rearview mirror. A drop in bank lending, escalating geopolitical tensions, and the impending elections generated enormous uncertainty in global markets. But by the fall, the US Federal Reserve paused its interest rate hikes, which resulted in a moderation of the tightening cycle, and even began talking about cutting rates.

Asset manager survey targets rates

Globally, 59% of respondents to the survey expect the Federal Funds Rate to be between 4.25%-4.75% – currently 4.4% – by the end of this year. Only 2% of insurers believe that the Fed Funds rate will be greater than 4.75%. More than nine out of ten respondents expect the 10-year U.S. Treasury Yield to be between 3.25% and 4.75% – currently 4.2% – at the end of the year. And 83% of respondents expect yields to remain at or below current levels.
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Expectations for a recession in the U.S. varied significantly across regions, with half of insurers still expecting the U.S. to enter a recession in the next two to three years. However, a higher proportion of insurers overseas don’t see the U.S. economy entering into recession in the next five years, compared with just 7% of respondents from the Americas.

A decreased percentage of insurers across all regions see inflation as a budding risk: 63% of insurers expect the period of heightened inflation risk to last a while, down from 76% in 2023.

84% of insurers expect rise in S&P 500

Nearly 84% of insurers expect positive returns for the S&P 500 index this year, compared to 74% of insurers last year. 22% of respondents are expecting modestly positive returns. Only 16% of respondents expect the S&P to yield negative results this year, compared to 25% in 2023.

“Equity markets expectations show quite a notable shift from last year,” said Matt Armas. the Global Head of Insurance at Goldman Sachs Asset Management. “What you see this year is that 52% of respondents, over half, believe that equities will return more than 5% this year with a very small number, only about 8% of respondents, believing that equities will return negative this year. This is quite a notable shift versus the equity expectations that we saw in last year's survey. A much more positive tone.”

Sachs, which oversees about $423 billion in insurance account assets following its 2021 acquisition of NN Investment Partners, is one of the largest non-affiliated insurance asset managers globally.

Insurers’ appetite for credit is growing, according to the survey: 35% of insurers look to increase credit risk in their portfolios over the next 12 months, despite 59% of insurers expressing concern that the credit cycle is entering a later stage. Overall, insurers are looking towards private assets, in part to diversify their exposure, with 53% of respondents ranking Private Credit among the top five asset classes with the highest expected return. Investment-grade Private Debt allocations also remain strong, with 33% of investors intending to increase their allocations to this asset class.

Private credit ranks as top returning asset

“I think one of the most surprising things about this survey was for the first time we've been doing the survey, we're seeing credit or fixed income assets at the top of the asset class return expectations,” said Armas. “53% of investors ranked private credit as the highest returning asset or the top five highest returning asset classes this year. This is a significant increase over prior years for all of the fixed-income assets.”

Following an aggressive rate hiking cycle, coupled with a general view that rates have peaked, respondents expressed their intention to increase duration in 2024 to the highest amount in the asset management survey’s history, thereby locking in higher yields on fixed-income securities.

For the first time, the asset management survey included questions about the use of artificial intelligence. About 29% of insurers are currently using AI, with 51% of insurers currently looking to implement AI technologies in their businesses, the survey found. Insurers see AI as having a broad range of uses: 73% are using or considering AI to reduce operational costs, while 39% are using or considering using AI in underwriting insurance risk. Other uses include investment evaluation, claims management, and more efficient client service functions.

ESG (environment, social, and corporate governance) remains a key investment decision consideration for most of Goldman’s clients. 84% of respondents said ESG is one or a primary consideration in their investment decision-making. Of Asian and European respondents, 95% said they incorporate ESG as a primary consideration in their investment decision-making.

“So, it is still a very important and a very strong driver of investment considerations in overall portfolio construction,” Armas said.

 

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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