2025 Mid-Year: Checking In, Looking Ahead

In a year already marked by tariff uncertainty, market volatility and macro-level changes, what’s next for the rest of 2025? In our newest podcast series, Checking In, Looking Ahead, our investment team provides insights and outlook on what’s to come.

Featured speakers 

Dec Mullarkey, Managing Director, Investment Strategy and Asset Allocation
Tim Boomer, Senior Managing Director, Head of Client Solutions and U.S. Business Development
Nitin Chhabra, Managing Director, Head of Insurance Solutions
 

Transcript 

Tim Boomer: Welcome to our podcast series, Checking In, Looking Ahead. Today we're talking about the macro, market and investment themes for the second half of 2025. I'm Tim Boomer, Head of Client Solutions, SLC Management, and joining me is Dec Mullarkey, Managing Director of Investment Strategy and Asset Allocation, and Nitin Chhabra, Managing Director and Head of Insurance Solutions. Thanks for joining us today. Okay, so it's been a bit of a roller coaster of a year so far. Dec, maybe to kick us off, I'm going to give you the difficult task of summarizing it all in a couple of minutes for us.

Dec Mullarkey: All right. Thanks Tim, great to connect. So, to curate what's happening this year, and as you said a lot is going on, I boil it down to three things. First of all, there's the tariffs. And they have been conducted in a fairly transactional way where they roll out a headline, get attention and then calibrate as the negotiation continues, and markets have been trying to process that as you go and reprice. So that's been, you know, one source of volatility. Another has been all of this chatter around the independence of the Fed, and the White House weighing in that they should have more say, more control. And of course that's not well received: markets place a huge premium on the independence of the Fed. It supports the dollar and how investors feel about what's going on in the U.S. So that's an important one, and again at this point the White House has backed off on that. And then the third thing that's out there is just the fiscal debt, the size of a fiscal debt and then all this conversation around the budget, where that's going to lead, is that going to add to it. And markets are really paying a lot of attention to that. So, all of this is having effects on equity markets, rates markets, on the dollar. The interesting thing with all of that, and one thing that's your question brings up: Are markets right to be, you know, moving back and forth with everything that's going on? And in many respects, I give them actually a lot of credit for calibrating as they go. In fact, that sends feedback to policymakers, and they've been reacting to it. So that's been the positive for portfolio managers. It's been incredibly difficult because even in a single day you get major moves, and yet you look over any period of time and you look like nothing's happened. So that's the environment we're in. That kind of summarized the year and you know, hopefully we're settling in. And some of this volatility is coming down, so that's the positive and markets are kind of adjusting as we go. So that's where we are right now.

Tim Boomer: And I think that point you made, Dec, around that if you look over a longer period of time, it can kind of look like nothing happened. For most pension plans that we work with, that's really been the experience. So, if you look at funded status today versus funded status at the beginning of the year, it's really pretty close. And so maybe if you had a higher equity allocation, you're a little bit lower than you were at the start of the year, or if you were less well hedged. But generally for most of the plans, discount rates are where they started. And equity markets are a little lower than they started, but it's not significant. But I think the experience that plan sponsors had over that period wasn't calm, and we had one week in April when equity markets were down almost 11% and then recovered again by the end of the month. If you were looking at funded status for your plan as a plan sponsor during that period, you might have had some heart palpitations during a few weeks, but at the end of it, it looks pretty benign. One thing for me, that maybe served as a little bit of a warning to folks: equity markets can move that rapidly and we all have short memories when it comes to market collapses. And so maybe for some people who are sitting on the sidelines and carrying a bit more risk than they were comfortable with, it will have been a little bit of a wake-up to maybe reassess that. Nitin, you deal a lot with the insurance market and you talk to a lot of insurance companies. What's their experience been over the first half of that year in that market volatility?

Nitin Chhabra: You know, I once heard someone say that insurance asset management is an “at the margin business,” and I think that does a really good job of describing the way insurers reacted to that volatility. So, here's how I interpret that statement. Strategic allocations are usually reviewed annually, or perhaps even less frequently. So, insurers are generally not making wholesale changes to their portfolios during these windows of opportunity like we saw during the month of April. You know, they tend to make what I would call tactical changes during these periods of dislocation. What we witnessed during April within our client base – there are a number of examples that come to mind – some clients marginally added to their equity allocation after the selloff. Some incrementally added to their BBB corporate bonds when spreads widened.

Tim Boomer: Yeah, and I think that at the speed at which markets have been moving, it really makes that difference between strategic long-term thinking and short-term tactical decisions. It really shines a light on it, and it can be very hard for a lot of pension plan committees or large institutional investors to move with that pace. So, it's been good that we've been seeing that there's tactical shifts on the margin. Dec, one thing that springs to mind here is a lot of the volatility we're talking about is really driven by factors external to the market. It's policy decisions or it's tariff decisions. What's the impact of that in terms of trying to predict where markets are going or trying to think about how clients should position for potential volatility when it can be very hard to understand what the next driver is going to be?

Dec Mullarkey: It's a great question. I mean generally, those exogenous shocks, political shocks or whatever are difficult to handicap. What's interesting about what's going on with the tariffs right now, first of all, is that it's global. I mean that's a shock in itself. But also the transactional approach here is pretty much a maximalist ask at the start of the negotiation, negotiations start to happen, and then it gets dialed back. And that's where markets are having this difficult time figuring out. Where is that going to land? And that's why they're repricing it, continuing to reprice as they actually go because they're not certain. So where does that leave markets? Generally, that leaves you in a position where you're not certain who the winners and losers are going to be. And that's been kind of played out through all of that, and even single companies are running into some headwinds and they're having to deal with reactions and how they behave. So, when you're in a situation like that – and Nitin hit on it – is you really want to stay close to your strategic asset allocations because that's ultimately where you want to end up, that's how you feel long run how you're going to develop wealth. And that's the best thing at that situation to actually do. To try and be too cute and play it, is just very difficult. And the one thing I would say that maybe on the margin when you're investing your dollars, that's where quality becomes important: dependable cash flows or where you feel certain assets have an advantage in terms of income or whatever. You might want to tilt a little more towards that. But to disrupt your existing portfolio, try to move it around, what you should be paying attention to is, “Is my risk management in good shape?”. And if not, you know, tighten it up. Get as close as you can to those targets and then kind of say, “Okay, well, maybe I'll stretch a little more for income and quality income as we go forward here, because we're not certain how long this will last.” But that's again where good risk management, good discipline around asset management really shines in that type of environment.

Tim Boomer: Yeah, the other thing that jumps out to me there Dec is really kind of a need for diversification. And I know we've we all talk about diversification all the time. But I think in the current market maybe more than historically when winners and losers are so hard to pick and can also be so targeted depending on different industries or different sectors, maybe that diversification becomes even more important. And I would say that with a lot of the investors we work with, we've seen things like looking to diversify equity portfolios into other asset classes that may be in a higher rate environment that can give you equity-like returns, but with a different risk profile, a different set of correlations, maybe a more consistent return profile, especially if we're talking about alternative investments. Nitin, I know we've talked in the past about how you've seen that on the insurance side. Do you want to touch slightly on how insurers are reacting to higher equity volatility and what that means for them?

Nitin Chhabra: I think the insurance industry has really embraced that diversification you just talked about. And that's especially true within the risk asset portfolios, which you know for insurers largely consists of equities and alternatives. So, taking a step back, for insurers the primary role of these risk assets is to help grow the company’s surplus position. And in recent years the industry has seen, you know, a marginal move out of equity and into various forms of alternative credit, such as direct lending, CLOs, real estate, debt. And the reasons for this move, a primary reason, is you're getting similar expected returns given the elevated rates we're seeing, oftentimes you're getting better capital treatment. But a big driver is the beneficial impact it has on overall portfolio diversification. That said, some insurers prefer to keep their risk asset allocation focused on equities. It's easy to understand, it's less complex, explaining it to key stakeholders like boards of directors or investors – it's just easy to understand. And given how equities have performed, that strategy has worked. But we're in this environment, a higher for longer rate environment that we're likely in, and in that environment alternative credit continues to model well in strategic asset allocation analysis that we do. So, we'd advocate for companies to consider how these asset classes can benefit their portfolios.

Tim Boomer: I think that point around different investors approaching it different ways, that's definitely a theme I would say broadly for most of the institutional investors that we talk to. If I think about the pension world, maybe in contrast to the insurance side, I think we have a similar landscape. On one side we have probably a lot of pension plan sponsors who have a short time horizon. They're planning on termination at some point in the future and for them, liquidity is important. So, their growth portfolio is going to tend to be largely equity, public equity focused. Their hedging portfolio is going to be largely public fixed income. And what we've seen with those plans is as they've become better funded, they've progressed down their glide paths and they've allocated more away from equities to fixed income. I do think one thing that we see there is the fixed income portfolio maybe needs to be looked at a bit differently as it becomes a bigger portion of your overall asset allocation. So, as you dial down equity risk, other risks are going to become a larger portion of your overall risk. So, there we think about a hedging portfolio – moving from maybe being about getting the overall hedge ratio where we need, to how we are thinking about credit spread hedge ratios or how we are thinking about curve risk. And then within that, how we are thinking about diversification now that we have a larger allocation to fixed income. Maybe we need to think about diversification across different manager types, different ways of adding alpha, or even looking at things like securitized fixed income as an alternative on the front end of the curve and things like that. So, how we can add some diversification in here while still maintaining liquidity within traditional asset classes? And I think like you mentioned, we have a second group of pension plans which have a longer-term time horizon. Maybe they're generally on the larger side, or they have an ongoing plan, or the plan is strategically more important to the company. For those plans, I think we've seen a similar thing that you mentioned, which is looking for alternatives to traditional assets, things that maybe fall in the gray area between hedging assets and growth assets. There we think of, like you said, direct lending, real estate debt, investment grade private credit – an alternative within the hedging portfolio. And generally they're all focused on diversifying away from traditional assets, adding yield or adding the potential for excess return and giving you an overall better downside risk, because you're spreading some of that risk out. So, it sounds very similar. Dec, that's where we stand today, and you know, we've talked about how we got here. We've talked about what we've seen plan sponsors doing and insurance companies doing. What's coming next for the rest of the year? And we won't hold you to it, I promise.

Dec Mullarkey: I appreciate that out, Tim. Well, certainly the trade risk is coming down. I mean, more deals are getting transacted. A lot of the maximalist asks have been dialed back and we're moving towards agreement. That's a positive because once you get some stability there, what companies crave is just knowing the rules and understanding, you know, what the terrain is going forward because they can plan around that. So, I think we're slowly moving to that phase, and that's positive. And I think that will improve the visibility on earnings. Consensus is not expecting a recession, and we're in that same camp now. You could have negative quarters or some close to close to zero growth here for the balance of the year into next year. And when you look at the GDP outlook, it is expected to be subpar for the U.S. this year and part of next year. And again, that's just the adjustments that need to happen around tariffs and how those get reflected in there. And that usually takes six months. When we looked at COVID and what happened there, you would say a lot of those shocks kind of take six months to work into the system. So, you know, we'll continue to work through that. Once the tariffs are out of the way, this administration can move on to more of the growth aspects of what they were looking to do, around maybe changes to the tax code, to regulation, and that's going to be positive for companies. The other thing is that as inflation becomes more and more under control, that gives the opportunity for the Fed to cut rates. Right now, markets are expecting two rate cuts this year. We're in that “one-to-two” camp and that remains to be seen because the Fed is completely wait-and-see. It's hard for them to make a move. The other thing that's in play and will deserve a lot of attention is really what happens on the budget and what that does to the fiscal deficit. Because that's getting some attention, but tariffs have dominated the headlines. But more and more attention is going to shift to that in terms of debt levels on sovereign balance sheets. And that this is becoming a global concern right now. So, we'll see more and more of that happening. And, you know Nitin made the point earlier, that we're probably in a higher-for-longer kind of rate environment. And all of this would add to that kind of narrative is that where we're at here, is that rates probably are going to stay higher than most would have expected a couple of years ago, that we're in that environment. So that's where we are, you know, a kind of recalibration, a rebalancing. I think we're slowly getting to that point. That is constructive, I mean certainly we're not expecting or we're not projecting that defaults are going to jump up, that employment is going to spike up. So, it could be a constructive environment, but a slow recovery.

Tim Boomer: So, Nitin, based on that, is there a particular scenario that you think impacts insurance companies more? Are they positioned for certain environments? How do you see that playing out?

Nitin Chhabra: You know, I've heard Dec talk about all of the different macroeconomic scenarios that we could potentially face. And of all of them, I think stagflation is probably the worst possible scenario for insurers, particularly property and casualty insurers. And that's because it hurts both the growth and profitability of these companies. So let's break that down. On the growth side, a slowdown in economic growth negatively impacts the amount of insurance premiums that these companies write. On the profitability side, higher inflation means higher insurance-loss costs. So, you put those two together, and that makes for a really tough underwriting environment for these companies. Now fortunately within their investment portfolios, there are strategies that they're able to implement to weather this type of scenario. And all of these strategies tend to have the same common theme of generating income backed by consistent cash flow. Some examples of asset classes where we're seeing insurance company interest include asset-based finance, narrowly syndicated bank loans, direct lending, CLOs, real estate debt. They all have that same common theme. So that's where we're seeing more and more conversations with insurers. Tim, I'd be interested to hear how you would answer that question with regard to pension plans.

Tim Boomer: I think for pension plans, probably the one situation which most kind of jumps out is when we see that breakdown in correlation, or negative correlation, between rates and equity markets. And I think we've seen that in the past a few times and we saw it recently as equity markets sold off and Treasuries didn't rally in the way that maybe they have in the past. And I think a lot of the asset allocation work that not just ourselves but that the market does for clients, for pension plans and probably for insurers too, is based on the premise that the U.S. will be the risk-free currency for the world. And I think there was a question there. My personal belief is that I still think that correlation will hold over the long run. I still think U.S. markets are in a stronger position than most others, but when we see that disconnect from what we've seen historically, a lot of the assumptions that and how we think about risk kind of fall out of the window. And so, I really have an eye on that, I would say, for the rest of the year. And I think it's important for us to again to go back to this point: diversification is key in the current market. I think when you can't hang your hat on any particular source of protection, you need to make sure you're covering a lot of bases. I think the other thing I would probably say in the current market that jumps out to me is you know it just emphasizes to me the need for active management. And so, we talked about long term strategic asset allocation and the importance of that, and I agree with you, Dec, that kind of staying true to your knitting and sticking for the long term is key, especially when it's very hard to predict where we're going. But I do think whatever environment we end up going into for the rest of the year, it's kind of unpredictable and I think people will either be, you know, wrong, or they'll be lucky. I don't think anyone knows where this is going. I don't think anyone can correctly predict where we're going. So, to me, you want to have a long-term strategic asset allocation that has diversification and positions you well for success in that. But you need to have some flexibility in there, like you mentioned with your insurance clients Nitin, to be able to pivot and take advantage of what the market gives you. So, you know, we talked about a few weeks ago when we saw spreads widen and it lasted for a week or 10 days. And if you are ready, you can take advantage of that and get paid for it. You need to have long-term strategic asset allocation, but managers with flexibility and the ability to act on that. And I think that's how you position yourself for whatever comes. I don't think any of us could accurately predict whatever's coming. So maybe to close, we could each say one thing that we're particularly focused on. I said mine already, but I'm watching that correlation or that inverse correlation between equity markets and Treasury yields and seeing if that holds or if the world has changed its view on the role of the U.S. Dec, what do you got your eye on for the rest of the year? What number are you watching?

Dec Mullarkey: So a lot of people said the 10-year rate. I'm actually watching the 30-year rate because the 30-year rates globally across whatever economy you're looking at – Japan, the U.K., the U.S., Germany – they reflect debt concerns. We're seeing that playing out that the 30-year rates are going up pretty much in unison across all those markets I mentioned. Germany is a special case, I'll get back to that in a second. But you see that investors are focusing more and more on the debt loads that sovereigns have, and governments being able to get away for a long time with borrowing and really building up that debt-to-GDP ratio that's quite high. And Japan leads the world in terms of that, so you see reactions right now that the jump in 30-year rates this year has been very notable, and in fact to the point where Japan said they're going to hold off issuing 30-year bonds because they were having what they call difficult auctions. They were having to pay more than they were expecting and the same thing is happening in the U.K. now. So that's something I'm watching is to just see the dynamics around that. And in terms of like the G7, the U.S. actually has done better. You would think they should be front and center on that and they are, but they've actually done better in terms of seeing less of a less of a spike in their 30-year this year. Germany, which actually has very low debt-to-GDP, has also seen theirs go up. But that is more a function of the fact that they have made this commitment that they're going to spend a lot more on defense infrastructure to help build up and supplement what's happening with NATO. So, they're kind of a special case. But anyway, the 30-year is what I'm paying a lot of attention to. The only other thing I will say is that when you look at corporate balance sheets and they’re in great shape, so at some point or other investors are going to maybe decide, “Okay, they're a better bet than the U.S.” I get we're not at that point, and to your point earlier that the U.S. is the home for most assets, absolutely. In fact, ETF flows this year show that there's been, you know, continuing equity flows into the U.S. and into fixed income. There was a week or two where that wasn’t obvious that would continue, but it has. So anyway, that's what I'm watching to see what's happening on those fronts.

Nitin Chhabra: And I guess I'll give my answer. So, for the rest of the year, I'm interested to see if stagflation worries pick up, and if so, what's the commentary that we'll get out of the publicly traded insurers on their earnings call. So, I'm going to be looking out for that.

Tim Boomer: That's all the time we have for this episode of Checking In, Looking Ahead. For more information, visit slcmanagement.com. Thanks for listening and have a great day.

 

Sources: Bloomberg, Financial Times, 2025. Content was recorded on May 29, 2025, and reflects views of the participants as of that date.

This content is intended for institutional investors for informational purposes only. This information is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information shared. Diversification does not eliminate risk nor protect against loss. Any statements that reflect expectations or forecasts of future events are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.

Content was recorded on May 29, 2025, and reflects views of the participants as of that date.

For institutional use only. Not for use with the public. Investing involves risk including the risk of loss of principal. This information is provided for educational purposes only. It does not constitute advice and should not be relied on as such. It should not be considered a solicitation to buy or sell a security. It does not take into account the investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult with your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation of warranty as to the accuracy of the information and SLC Management shall have no liability for decisions based on such information. The whole or any part of this work may not be reproduced, copied or transmitted or any of its concepts disclosed to third parties without SLC Management’s express written consent.
© SLC Management 2025
SLC-20250623-4566730