A majority of insurers expect private credit to generate the highest returns over the next 12 months, according to the latest Goldman Sachs Asset Management (GSAM) insurance investment survey.

They are adding risk to their portfolios, too, said Matt Armas, GSAM global cohead of insurance, at a press briefing, showing cautious optimism about markets and the global economy.

This is in stark contrast to the findings in 2023, when a decline in bank lending, escalating geopolitical tensions and the impending elections generated a range of uncertainty in global markets, he said. But last fall, the Federal Reserve pressed pause on interest rate hikes, which resulted in a moderation of expectations for further monetary tightening and indicated a more resilient economic outlook. This environment, he said, caused a rally in fixed income and equity markets and “set the stage for renewed risks and opportunities for all of our insurers.”

GSAM, which oversees about $423 billion in insurance account assets, polled some 359 CIOs and CFOs, who altogether represent more than $13 trillion in global balance sheet assets—or, as Armas put it, “about half of the global insurance assets under supervision.” This is the firm’s 13th annual survey.

Not less than 98% of respondents said they believe the Fed will cut rates this year, he continued, and fully 83% expect the 10-year U.S. Treasury will be at or below today's levels by year-end. “This signals to us that the respondents believe that the 10-year Treasury has peaked and would appear to have peaked in 2023,” he said.

In addition, some 53% of insurers surveyed said private credit will be the asset class with the highest total return for the year. “This is the first time we've seen a fixed income asset as the highest expected return asset class in our survey,” he said, adding that 43% of investors surveyed are looking to increase their allocations to investment grade private debt.

There is ongoing concern about the U.S. economy, he said, but this year’s survey shows a “big decline” in worry about inflation, particularly following recent Fed policies. The percentage of respondents who believe that inflation will be transitory has increased from the preceding year, and there’s been a marked decline in investor expectations that inflation is a medium-term event.

Nevertheless, some respondents are still hedging against inflation risk. Roughly 36% of those in the Americas believe that floating rate assets—typically, bonds with interest payments that fluctuate with underlying interest rates—provide the best hedge against inflation.

Accordingly, there has been a year-over-year decrease in interest in commercial mortgage-backed bonds, which he said probably reflects “concerns around the expected returns from real estate assets.” Municipal bonds are also seen as relatively expensive, he said, adding, “Corporate debt just offers better value for investors.”

None of which is to say that fears of a U.S. recession have vanished. Some 66% of respondents believe that a recession will occur in the U.S. within the next three years, he explained, though less than a third of those people said they believe it will occur this year. That’s down from last year’s results, when more than 20% expected a recession by year-end.

Fixed income isn’t the only category that insurance investors are bullish about. As much as 52% of respondents believe that equities will return more than 5% this year. Only about 8% felt that equities will end the year in negative territory, which he called “quite a notable shift versus our equity expectations that we saw in last year's survey.”

Two other topics on people’s minds are artificial intelligence (AI) and environmental, social, and corporate-governance concerns (ESG).

Fully 51% of respondents reported that they are looking to implement AI in their operations, and 29% said they are already using it. “So a very rapid adoption of this emerging technology,” he said.

At the same time, a whopping 84% of respondents said ESG is “one or a primary consideration in their investment decision-making,” he said. It is “still a very important and a very strong driver of investment considerations in overall portfolio construction,” he said.

Asked whether further delays in interest rate reductions could impact investors declining pessimism about inflation and recession risk, Alexandra Wilson-Elizondo, GSAM’s co-chief investment officer of multi-asset solutions, said it was certainly possible. “In that context, she said, “[what matters most to investors is] proper portfolio construction, diversification of risk, and being able to be nimble and manage what could ultimately be variable outcomes this year.”