A panel of Chief Investment Officers at the S&P Global Ratings’ Annual Insurance Conference have applauded the swift action of the US Federal response to the COVID-19 pandemic.
During the virtual conference, Peter Gailliot of BlackRock Inc. said that the Fed had acted quickly to the unprecedented shock of the pandemic and subsequent recession.
Meanwhile, Timothy Schmidt, of Prudential Financial Inc., said that the move to pump liquidity into the market was crucial, adding, “I applaud the efforts they have taken so far to date.”
However, Scott Minerd, of Guggenheim Partners, raised questions about the response, mainly in terms of the Fed’s decision to buy corporate bonds.
This move has created a moral hazard, Minerd argued, especially considering how leveraged corporates were before the crisis began.
And some of these Federal actions to pump liquidity into the economy may be moot if there’s no one to buy it, panelists said, with Gailliot pointing to the massive income inequality in the U.S., which has meant that those who are most able to take advantage of the new liquidity may need it the least.
Partially as a result of this mismatch, panellists expected that equity markets and large multi-national corporations may recover sooner than the labour market.
In terms of what came next for the federal government, Gailliot said that the Paycheck Protection Program may be “front and center” for Congress in the coming months, while Minerd brought up the Smoot-Hawley Tariff of 1930, which raised import duties on foreign goods and may have contributed to the depth of the Great Depression.
Additionally, the panellists agreed that commercial mortgage loans would be the asset class most at risk of impairments, but were less convinced that other sectors of commercial real estate were high risk, saying they had more concerns about energy, deep mezzanine, and other types of corporate loans.
S&P added that the pandemic and the new lower for longer interest rates to stimulate the economy will mean life insurers are going to have to change their assumptions for this year and the years to come.
