Source: Barron's Chinese Author: Nicholas Jaskinski Evan Greenberg, CEO of Chubb Ltd, has a highly influential fan - Warren Buffet, CEO of Berkshire Hathaway. Berkshire Hathaway disclosed last month that it held 6% of the shares in Chubb, one of the world's largest insurance companies, by the end of 2023. Berkshire itself is a major participant in the insurance industry, but it is not the only buyer. In the past year, Chubb's stock return, including dividends, was about 40%, surpassing the S&P 500 index's total return of 25%, and making the company's market capitalization reach $110 billion. This increase in market capitalization reflects Chubb's outstanding performance, which is attributed to its prudent underwriting practices and conservative management of its investment portfolio of about $140 billion. The company's earnings per share increased by 48% in 2023 and its book value per share increased by 21%. Greenberg is the son of Maurice "Hank" Greenberg, the former CEO of American International Group (AIG). Greenberg worked at AIG for 25 years, rising through the ranks. He left the insurance company in 2000 and took over Ace Limited in 2004. The company merged with Chubb in 2016, the largest M&A in the property and casualty insurance industry at the time. Today, Chubb is the largest commercial insurance provider in the United States, and the company is also known for its high-end homeowner insurance for the wealthy. However, about half of the company's premiums last year came from outside the United States. Asia has always been a growth area where the company is bullish: Although Asia accounts for 40% of global GDP, the insurance industry accounts for only 26% of the global insurance market share. This gap is expected to narrow over time. Greenberg sits on the board of several nonprofits that focus on international and Asian affairs. Barron's recently interviewed Greenberg about his underwriting philosophy, the challenges of dealing with increasingly frequent climate disasters, and US-China relations. Following are the edited excerpts of the conversation.
Author: Paul R. La Monica

One of the most anticipated questions for investors this year is when the Federal Reserve will start cutting interest rates and how much the rate cut will be. The moment is finally approaching, and the financial market currently expects a 100% probability of a rate cut announcement by the Federal Reserve at its policy meeting on September 18. As for the magnitude of the rate cut, due to strong inflation stickiness and a relatively healthy job market despite softening, market expectations for a 50 basis point rate cut by the Federal Reserve are cooling off, while the probability of a 25 basis point rate cut is increasing.

However, after a long preparation, the stock market's reaction when the rate cut finally arrives may not be as significant as people expect. The futures market has not only priced in the rate cut in September, but also the expectation of a total of 100 basis points rate cut by the Federal Reserve within this year and the anticipation of several more rate cuts in 2025. According to market expectations, the federal funds rate target range will decrease from the current 5.25%-5.5% to 3%-3.25%.

During this summer, the US stock market experienced significant volatility, but it has still risen by nearly 15% so far this year, with a difference of less than 4% from its historical high. At the same time, the market's price-to-earnings ratio is close to 20 times, slightly higher than its historical average. Fixed-income investors have also bet on multiple rate cuts, with the two-year Treasury yield dropping significantly from around 4.75% in early July to around 3.65%.$S&P 500 Index (.SPX.US)$This summer, the US stock market experienced significant volatility, but it has still risen by nearly 15% so far this year, with a difference of less than 4% from its historical high. At the same time, the market's price-to-earnings ratio is close to 20 times, slightly higher than its historical average. Fixed-income investors have also bet on multiple rate cuts, with the two-year Treasury yield dropping significantly from around 4.75% in early July to around 3.65%.

Therefore, the Federal Reserve's first interest rate cut may become a typical "sell the news" event, at least initially, but it all depends on whether the rate cut helps the US economy avoid a recession or simply mitigates the impact of a recession on the US economy. However, the impact of the rate cut has a lag effect, so regardless of whether the initial rate cut is 25 basis points or 50 basis points, the impact on the economy will only be seen after a period of time.

At present, investors and many economists are still betting on the "But after the bursting of the internet bubble and the Fed's rate cut in 2001, the ROI dropped by more than 10%.": The Atlanta Federal Reserve's GDPNow model shows that the US third-quarter GDP growth rate is expected to reach 2.5%; inflation continues to slow down, with the year-on-year CPI increase narrowing to 2.5% in August, marking the smallest increase since February 2021. The probability of the Fed gradually lowering interest rates instead of making a substantial reduction is increasing.

A "soft landing" is bullish for stocks. Seema Shah, Chief Global Strategist at Principal Asset Management, pointed out that since 1970, the US stock market has risen more times than it has fallen in the six months following the first rate cut. She said, "The key factor determining the performance of the stock market has always been whether the US economy avoids a recession. History shows that the rate cut itself is not the enemy. Investors should pay close attention to the economic backdrop in which the rate cut occurs."

But investors must remain cautious. In$NVIDIA (NVDA.US)$and driven by other large-cap technology stocks, the overall market valuation is still high. However, there are still some attractive choices in the stock market.

Matt Stucky, Chief Stock Portfolio Manager at Northwestern Mutual Wealth Management, pointed out that the S&P 500 index, weighted by market capitalization, is highly dependent on the "big seven". Therefore, an equal-weighted S&P 500 index is a better bet, with an expected PE ratio of only 16 times in 2025, compared to an average expected PE ratio of 28 times for the "big seven".

Stucky said, "At this stage, investors should focus on 'quality' and 'defensive' stocks, and look for opportunities from stocks with reasonable valuations, embracing diversification."

“Don't go against the Federal Reserve.”

With the interest rate cut approaching, the following stocks are expected to benefit from a "soft landing".

The time has come for the recovery of the battered energy sector. Although demand concerns have caused oil prices to fall below $70, the situation in the Middle East remains turbulent, and oil stocks have become very cheap. The Energy Select Sector SPDR (XLE) ETF, which focuses on the energy sector, has a projected PE ratio of only 11 times by 2025, lower than the historical average of nearly 16 times. David Allen, Director General Manager of Octane Investments, an asset management company focusing on the energy sector, pointed out that there are even cheaper energy stocks, such as the French oil giant $TotalEnergies (TTE.US)$ has a projected PE ratio of only 7 times by 2025.

While the U.S. economy is slowing down but not collapsing, it will bring a boost to some retail stocks, especially for consumers who choose cheaper goods. Thomas Raymond, partner at Callan Family Office, believes that $Walmart (WMT.US)$It's a great example, the company has streamlined its operations through artificial intelligence, and its stock price has risen by over 50% this year. Raymond said, "Walmart is not a technology company, but artificial intelligence has helped the company reduce costs and improve profitability."

Investors should not completely overlook the technology sector. In addition to large-cap chip stocks such as Nvidia, which have soared due to artificial intelligence, there are also some attractive stocks in the technology sector.

Morgan Stanley Wealth Management ($MORGAN STANLEY (MSTLW.US)$ Chief Investment Officer Lisa Shallett of UBS Wealth Management is still bullish on software stocks. UBS analysts recently released a stock selection list that includes several software stocks, including$Oracle (ORCL.US)$as one of their top picks.$Oracle Corp Japan (4716.JP)$Recently announced a new cloud database partnership with AWS.$Amazon (AMZN.US)$UBS analysts are also bullish on the human resources software company $Dayforce(DAY.US)$.$Dayforce (DAY.US)$ (DAY), customer relationship management service provider$Braze (BRZE.US)$ $Braze(BRZE.US)$ (BRZE) and cybersecurity software company$CyberArk (CYBR.US)$ Software (CYBR). Nick Frelinghuysen, Managing Director and Portfolio Manager of Chilton Trust, pointed out that IBM is another large-cap technology stock worth holding. He believes that IBM's software and artificial intelligence business are undervalued, and in addition, IBM's dividend yield exceeds 3%.

In addition to stocks, don't forget about bonds. Even before the first interest rate cut, bonds have already risen sharply and yields have fallen. However, there are still some attractive fixed income investments in the future, especially if the Federal Reserve continues to cut interest rates next year. Bret Barker, Managing Director and Co-Head of Global Rates at TCW Group, expects the Federal Reserve to potentially 'overshoot' during the rate-cutting process, just as it did during the hiking process. Barker said, 'This could further depress long-term bond yields and stimulate housing demand.' As a result, Barker has increased his holdings of mortgage bonds in his fixed income investment portfolio.

A mortgage-backed securities ETF under DoubleLine Capital has a yield of over 4%, higher than similar ETFs under Vanguard, State Street, and BlackRock.$State Street (STT.US)$The Federal Reserve's interest rate cuts are not the only factor determining the trend of bond yields. Increased government spending may weaken the impact of looser monetary policy. After this year's U.S. presidential election, the U.S. government may introduce more fiscal stimulus measures at a time when the Federal Reserve has already begun cutting interest rates. Due to concerns about increased fiscal spending, Gargi Chaudhuri, Chief Investment Strategist for BlackRock Americas, recommends that investors choose bonds with maturities ranging from 3 to 7 years.

Chaudhuri said, 'Regardless of the outcome of the November election, the U.S. deficit situation may worsen, the yield curve is steepening, and bonds are starting to play the role of 'ballast' again.'

Chaudhuri said, 'Regardless of the outcome of the November election, the U.S. deficit situation may worsen, the yield curve is steepening, and bonds are starting to play the role of 'ballast' again.'

Compared with the beginning of this year, it is now more difficult to find cheap targets, but this does not mean that the stock and bond market rally has ended. Choudhury pointed out that investors still have over $6 trillion invested in money market funds, and the yield from these funds will be significantly reduced when interest rates fall.

If these investors have not yet developed a Fear Of Missing Out (FOMO) mentality towards the stock and bond markets, they will sooner or later bring about a wave of FOMO trading.

The next thing to watch is the actions of Federal Reserve Chairman Powell.

Editor/rice