Kimmo Koivurinne: Approaching the autumn in gloom
The third quarter of 2022 continued along the same lines as the start of the year: the pension assets that form part of the earnings-related pension system funding decreased by about EUR 2 billion and totalled EUR 237 billion at the end of September. The feeble performance of exchange-traded shares and fixed-income investments decreased assets during the quarter. Tightening interest-rate policy, the European energy crisis and poorer economic outlooks were reflected on the investment markets as a generally reduced appetite for risk.
In this blog post, I discuss the events on the financial markets since the summer in more detail. Our most recent asset information may be found on the Amount of pension assets page.
The uncertainty on the financial markets only let up for a moment in third quarter of this year. The inflation caused by Russia’s invasion of Ukraine in February continued to rise, which moved the US Fed to tighten its monetary policy yet again.
Inflation in the US dropped only slightly from the previous quarter’s highs and continued to run at above eight per cent year-on-year. In Europe, inflation continued to hit new records: consumer prices in September had increased 10.9 per cent year-on-year. European inflation was driven by increased energy prices, which in turn was passed on to the prices of goods and services.
As I wrote in my last article after the second quaret (Grim second quarter overshadowed by war), interest rate hikes have a chilling effect on the stock markets. That is what has happened now: the Fed’s steep interest rate hikes — first 75 bps in July and then another 75 bps in late September — brought peak inflation under control. To tame rapid inflation, the ECB and the Bank of England also raised their interest rates twice during the quarter. Even though the stock markets experienced a momentary rally in July, the quarter when viewed as a whole shows the markets continued the declining trend seen all this year.
The world’s most tracked stock market index, the S&P 500, continued its decline towards the end of September, with its entire year-to-date losses approaching 25 per cent. The Nasdaq tech index, for its part, has suffered even more severely this year: its yield was almost -33 per cent at the end of September. European stocks also declined, if at a slightly gentler gradient. The Stoxx index and Nasdaq Helsinki also showed more than 20 per cent losses for the year to date at the end of September. In Europe, one of the biggest losers of the year, Nasdaq Stockholm, has fallen a full 32 per cent this year from its highs at the start of the year. The Swedish Riksbank also began raising interest rates from zero, landing at a 1.75 per cent policy rate at the end of September.
If the main concern on US markets has been a tightening monetary policy, Europe has wrestled with even more tangible threats: the inflationary trend has not been reversed, hitting the entire economy through rising prices. In addition, Central Europe foresees a particularly severe winter because of the energy crisis resulting from the war in Ukraine. It light of these facts, the general European economic outlook does not look encouraging, which has a negative effect on the valuation of European stocks.
In addition to the Eurozone, the UK also experienced an unusual quarter. At the end of September, the new prime minister’s Conservative government presented its mini-budget. The mini-budget not only enraged the opposition, but also spooked the markets in a way seldom seen: an expansionary economic policy combined with already high inflation saw gilt yields soar and sterling slump. The pound fell to a record low against the US dollar. Such a combination was poison to British pension investors, whose derivative positions’ cash collateral sky-rocketed as market parameters changed sharply. Meeting these increased collateral demands forced pension funds to sell their investments to such an extent that the Bank of England had to quickly intervene with a GBP 65 billion gilt purchase programme.
Diversification mitigates losses
Finnish earnings-related pension investors have come through the stock market decline of this year, thanks to diversification. Liquid asset types — quoted stocks and bonds — have shown significant losses. Given the general market conditions, investments outside the stock markets, such as property and capital, as well as non-listed share investments have, as a kind of anomaly, continued to offer a positive nominal yield. With that in mind, the final quarter of the year (or the start of the new year) could yet see these investments experiencing losses.