How to invest wisely in 2024

Ramzi Bibi, Head of Treasury and Investment at Arabia Insurance Company, shares his views on burgeoning investment trends in 2024.

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Ramzi Bibi, Head of Treasury and Investment, Arabia Insurance Company.

Andrew Putwain: Can you tell us about your role and Arabia Insurance’s approach to investment and asset management?

Ramzi Bibi: I manage the investments of Arabia Insurance globally. We manage the investments and liquidity for our operations in Lebanon, the UAE, Qatar, Bahrain and Kuwait. We also have subsidiaries in Jordan, Oman, and Saudi Arabia where we often have an advisory role.

My role as head of treasury and investment is asset management – managing all of the company’s assets, as well as asset liability management (ALM) and optimising the company’s cash flows and loans.

We have a segregation in terms of our assets; we have our ‘core’ assets, which is the big chunk, at around 80-85% of our assets and then we have the ‘active portfolio’, which must be liquid, create alpha, and outpace the benchmarks.

The latter assets are where the bulk of my work comes in, centred on active management. We try to cut interest expense and be more efficient operationally. If we see any gaps within the core portfolio, that's when we revert to the investment committee and maybe change our perspective or our strategy.

Andrew: To build on that, what are you seeing in the wider economic sphere – such as growth and decline in various regions? Whether that be core non-core, ESG, regulation, geographic differences, etc.

Ramzi: In terms of portfolio management, the markets that we deal with are highly competitive ones – such as the UAE, which is the most developed market in the Middle East.

It's a highly competitive market from an insurance standpoint, in terms of business and investment. We invest in the UAE just for what we need for solvency purposes and cash flow requirements.

Most of our investments are in the US. In terms of our active investments, they're 85% in the US. In terms of our core investments, they're roughly 40% global allocation (mostly US) with the rest in the GCC.

Now, when we talk about investments in the Middle East and GCC, we make more conservative choices. We don't take that much risk. The reason for that is around liquidity in these markets; regulation in Saudi or Dubai is different from the US.

In terms of asset classes that are seeing growth or decline, there is a regional or geographic element at play, and we see a lot of interest in bonds – specifically in the next two to five years.

"Every time there's an inversion of the yield curve markets panics, but sometimes we fail to remember that it doesn't always cause a recession."

We don't think inflation is suddenly going to disappear, but, at the same time, we don't think inflation is going to 8% or 10%. Just like there was stability in a low interest rate environment, we expect less volatility in interest rates going forward, in the next two-three years.

The leading indicator with rates is the inversion of the yield curve. Every time there's an inversion of the yield curve markets panics, but sometimes we fail to remember that it doesn't always cause a recession.

In 2022, there were a lot of arguments about recession. Recession has a clear definition; it's two negative quarters. The UK had a recession, and the US had a recession in 2020.

That recession deeply affected markets and interest rates. So, as to where we see the sweet spot, if you will, in the Middle East and in general and the markets and these semi-developed markets, we see them in high-rated bond names within the two-to-five-year range.

More specifically, I would still stick to an 80% allocation of variable coupons rather than fixed coupons. Last year, 100% of our allocation was in variable coupons and, in the last six months, we developed the appetite to take on some fixed coupon bonds, an indication that we believe there will be more stability in rates and inflation.

With our Middle East investments, we would prefer to invest in more developed markets, but at the same time, a sizable chunk of the liquidity we have involves these markets. It’s already earmarked, and we’re constantly on the lookout for opportunities for potential mergers and acquisitions (Mas).

We always have those more liquid funds in developed markets, like equities, bonds, and deposits and loans.

Andrew: Can you discuss the trends in the insurance asset management sector that you’re seeing and those that are particularly interesting to you?

Ramzi: Many of the insurance companies in the Middle East are private companies, and that means that, partly, they aren’t as open to new ideas.

The market here in the US and the UK is more open to innovation and disruption.

For example, we have been testing Artificial Intelligence (AI)-generated value-based automated investments, but I wouldn't say it's a viable part of our portfolio yet. It's close to 5% of our active portfolio. It is an avenue that has been doing well for us, and we have partnered with others to test the performance of these investments as a standalone, automated recommendation and also as a hybrid with human intervention.

We have found that human intervention with AI, at least for now and for the short term – I’m talking this is fresh, six-to-nine months – has shown above market returns. That is something interesting to me as an investor.

In hindsight, when you back test these algorithms, they show you a lot. We were exposed to an AI algorithm from Denmark that showed a 50% return in a downward market in 2022. This performance was pivotal as we took proactive steps to test emerging technologies before they achieved widespread adoption.

Andrew: Is AI something you're seeing fellow investment managers exploring? Have you had any discussions?

Ramzi: I'm lucky to have an open-minded CFO and CEO, who have been around for two years. We're not all in on the strategy, but we’re getting with the times. My CEO and CFO are aware of the opportunities there. I’d say the accurate word is ‘dabbling’.

Andrew: Can you discuss specifically what you’re seeing in fixed income, and how the area has been affected by high interest rates and inflation?

Ramzi: We did well in the fixed income market because, as I said earlier, the rates and bonds that we took in the last couple of years were variable interest rates which alleviates interest rate risk.

What's interesting to me is that when we decided to unload risk and take on treasuries, it was probably the worst performer. US Treasuries, which are usually a risk-free asset, were one of the worst performers in the last year. The secondary A-rated or even BBB+-rated variable bonds are stable, which shows that sometimes opportunity is where you're ready to take it.

Where there is risk there can be a reward ready to be unlocked. I’m currently at Columbia University studying risk management, and one of the biggest takeaways from my programme is to unlock risk in an accreditive strategy to shareholders; to take on risk, you understand it, quantify it, and monitor it.

"We don't see the Fed and other central banks dropping rates by 2% or 3% unless there's a recession."

When you have modules that show you these ranges of subpar top-rated bonds that are doing well, you see that there's a reason for that. The sweet spot is not Government bonds, but investment grade (IG) US bonds, or even some European bonds on the two-to-five-year range. We're ready to take on variable coupon bonds, but we're also ready to take 40% of our bond allocation into fixed income bonds, expecting stability in rates.

We don't see the Fed and other central banks dropping rates by 2% or 3% unless there's a recession. I don't see a recession in the next year or two; however, 2026 is a different story.

There are mathematical probabilities that illustrate trends of recessions over time. The economic figures that the Fed and other central banks study are usually 18 months out, if the Fed does not look more than 2 years ahead why would investors or analysts think they can?

Andrew: What are your thoughts on the expected/actual impact of regulatory announcements/actions – whether that be in the US, Middle East, or globally?

Ramzi: I’ll break this down by US, Europe, and Middle East/emerging markets.

The US is expected to change given the coming election. The markets are predicting a change towards a conservative president, and, with that, comes a lot less regulation. The market has been unusually resilient this year, which is a possibility for this sentiment.

Change happens over time, and a lot of these political changes don't show up in a year or two, but in six or seven. Take the Silicon Valley Bank’s (SVB) failure last year as an example. It was a pivotal point in US regulation, and now we're going to move to an overcorrection in regulation, which could in turn lead to new systemic risks globally.

Looking at Europe. There are many moving parts; a war, supply chain constraints, Brexit. There’s so much going on in Europe that I just avoid the region unless it's an opportunity with a strong competitive advantage.

"Younger professionals ask me about currency speculation, and my answer is always that there are just too many moving parts."

For example, all the issues that we're seeing in Boeing have made me take another look at Airbus – not because Airbus is so undervalued, but because it should benefit over the long term from all the operational issues Boeing is going through.

So, I wouldn't go so heavily into Europe – unless there’s global reach – as everything is in flux, politically and operationally.

Currency is another factor. Younger professionals ask me about currency speculation, and my answer is always that there are just too many moving parts. Who am I to predict what a specific economy, industry, or central bank will do next? Whereas, for a company with quarterly earnings, in a specific sub-sector, and where I know who the CFO is and can ask the CEO questions, it’s much easier to build that perception and project into the future – compared to ever-changing macro variables.

With the Middle East, there has been substantial movement in terms of the adoption of regulatory standards. They have been highly proactive with their markets, asking the right questions and modernising their processes in Qatar, Bahrain, and the UAE, trying to prop up their compliance to meet international standards.

This is spreading across the GCC, where we're seeing lots of positive developments – for example, in Saudi, in terms of market transparency and opportunity, and a more liberal approach to socio-economic issues – which will be positive for the region.

Andrew: What are your thoughts on emerging asset classes and investment styles?

Ramzi: There is a buzz around tech in India but also in mainstream investment areas. A lot of US companies work closely with Indian companies, so Indian companies understand what US companies want.

India is a natural growth partner, and we’re seeing substantial returns.

In China, we've seen regulatory issues that could be exacerbated by the US election. depending on who wins. A Republican president, whom the market is considering a frontrunner, could heavily affect markets with a swing in policy.

"If issues can be overcome with planning and operational efficiency of their resources, then the sky's the limit for Africa."

Africa is an interesting growth area. It’s a continent that had a poverty rate of close to 40%; now there are expectations that this percentage will decrease by half in the next 20-to-30 years. This will be great for the world and the talent and potential of a young Africa; however, the big barriers to entry are the nepotism, corruption, and most importantly currency fluctuations.

There are predictions that Africa will grow substantially. If issues can be overcome with planning and operational efficiency of their resources, then the sky's the limit for Africa.