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Tuesday 07 May 2024
Investment Talks
May 2024 | As a structurally uncorrelated source of risk and return, we believe catastrophe bonds and inflation-linked securities (ILS) may permit investors to build more diversified and resilient portfolios. This could be particularly true now, as the rate on line (the ratio of premium paid to loss recoverable in a reinsurance contract) for private ILS formats and the cat bond market spread remain elevated and could provide attractive total yield potential. We believe the combination of continued elevated pricing, combined with the ongoing demand for reinsurance, may present an attractive investment opportunity throughout the remainder of 2024 and into 2025.
01 | The performance of insurance-linked securities, including catastrophe bonds, is linked to low-probability but high-severity events. As a result, their performance generally has a low correlation to traditional financial markets.
02 | The reinsurance industry has existed for over 150 years, and its benchmark, the Swiss Re Global Cat Bond Index, has delivered positive returns in 20 of the past 21 years.
03 | A supply/demand imbalance for reinsurance, compounded by recent events over the past several years, may have significantly increased the investment opportunity, and we expect these trends to continue into the foreseeable future.
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management as of April 30, 2024 . Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the [author] and not necessarily Amundi Asset Management and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product or service. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not indicative of future results. Amundi US is the US business of Amundi Asset Management.
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To date, the US tech winners have been those companies that are engaging in substantial AI investments. The question is how and/or when will these be monetized. In the US, we expect a reset of the tech sector valuation levels, and we prefer to diversify risk away from monothematic AI plays. Specifically, leading memory players are building up capacity in high-bandwidth memory, which supports the training of AI models, and there could be a risk of over-capacity. There is also a greater focus on geopolitics among investors, and share price volatility could increase in 2025 as Trump's government is inaugurated. The primary issues are tariffs, revisions to the US Chip Act and a fall in China-US relations, all factors that could hurt the semiconductor supply chain globally.
Corporate debt spreads have tightened to near-record levels as the US economy has continued to expand and the Fed has begun to decrease its short-term interest rate target. We believe the improving credit health of the loan universe, the fact that loan coupons are priced off the front end of the still-inverted curve, and the strong possibility that the Fed will be unable to cut rates quickly due to sticky inflation, support the inclusion of loans in income-oriented portfolios. Additionally, considering the likely continuing stickiness of core services inflation, we believe floating rate assets such as loans are currently an attractive option to add diversification to investors’ fixed income portfolios, which are generally weighted in favor of fixed-rate instruments. In effect, we consider loan allocations to represent hedges against continuing high inflation.
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