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Return on Elo’s investments remained positive in exceptionally uncertain market conditions

Elo Interim Report 1 January - 30 September 2015:

  • The return on Elo’s investment operations was 2.4 per cent for the period 1 January – 30 September 2015. 
  • At the end of September, the value of investments totalled EUR 20.1 billion. 
  • Elo’s solvency remained strong despite fluctuations in the investment markets. The solvency ratio was 23.9 per cent of technical provisions while the solvency capital was 2.1 times the solvency limit. 
  • Elo’s solvency capital was EUR 3,907 million at the end of September.

“The uncertainty in the investment markets increased substantially in the late summer. During the third quarter there were clear signs of a slowing down of Chinese economic growth, which, combined with the continued weakness of other emerging markets, caused exceptionally strong fluctuation in the investment markets. The slowing down of emerging markets’ economic growth will inevitably be reflected also elsewhere, as these markets currently account for 40 per cent of the global economy. However, economic growth in the Western countries remains moderate,” says Hanna Hiidenpalo, Elo’s Director and Chief Investment Officer.

Equity market decline steepens
The decline in commodity prices and China’s economic uncertainty were reflected in the equity markets, whose decline steepened in August. Cyclical industries and the emerging markets, in particular, have been weak.

“Corporate earnings outlooks have also been downgraded for next year. The equity markets’ high pricing in the spring has declined nearer to the longer-term average levels in most markets. European equity markets have yielded better returns from the beginning of the year than US markets, but have declined from the spring highs more than the USA,” Hanna Hiidenpalo says.

Returns on Elo’s equity investments were 4.7 (7.3) per cent. Investments in unlisted equities produced returns as high as 12.1 (9.7) per cent, and returns on private equity investments were 18.7 (15.4) per cent. Elo’s equity risk has been lightened somewhat in relation to the situation at the beginning of the year.

Interest rate hikes postponed
The moderate decline of interest rates in Western industrialised countries, which commenced in the summer, continued also in the autumn. Declining commodity prices and dwindling economic growth have kept inflation under the central banks’ target level. The US Federal Reserve has had to postpone the beginning of its planned interest rate hikes again and again despite the clear improvement in the employment situation.

Emerging economies have been suffering from structural problems already for some time. In August, China’s central government allowed a higher variation range for its currency than before, which caused a sudden weakening in the external value of the renminbi. Nearly all emerging economies’ currencies have weakened since the late summer, which has been discernible especially in the returns of fixed income investments quoted in local currencies.

“Since the end of July, corporate bond margins have been growing in the energy and mining sectors, and also in other sectors. The supply of new corporate bonds has decreased considerably as uncertainty grows. We substantially reduced the proportion of corporate bonds in our investment distribution already in the spring,” Hiidenpalo says.

Returns on Elo’s fixed income investments totalled -0.2 (3.4) per cent. Loan receivables yielded a return of 2.3 (2.2) per cent.

Real estate produces good returns
Real estate, which made up 14.2 (14.0) per cent of Elo’s investments at the end of September, produced steady returns in the uncertain financial conditions. Returns on real estate investments were 5.8 (4.0) per cent. Especially good returns were produced by real estate investment funds and collective investment undertakings, whose return was 8.5 (4.1) per cent.

In other investments, returns on hedge fund investments were 2.2 (5.3) per cent.
The five-year average nominal return of Elo’s investments was 4.4 per cent (1 October 2010 – 30 September 2015), and the ten-year average nominal return was 4.6 per cent (1 October 2005 – 30 September 2015). The investment returns of LocalTapiola Pension Company were used for the period 2005–2013.

Global economic outlook for rest of year is uncertain and contradictory
The performance of the Chinese economy is likely to remain the greatest near-term risk factor for global economic performance and also for the investment markets. However, China’s economic policy can well accommodate stimulus programmes, which can be used to support economic performance.

The near-term outlook for OECD countries is still moderately good especially in the USA and partly also in the euro area. In the USA, economic conditions may soon require the Federal Reserve to raise the federal funds rate, but in other parts of the OECD, financial policy is likely to remain very expansionary for a long time.

“Finnish economic growth and the growth of the payroll, which is important for the pension system, are crawling along near zero this year. Unfortunately, there are still no signs of nascent growth in the Finnish economy in the near future,” says Satu Huber, Managing Director at Elo. 

Elo Mutual Pension Insurance Company Interim Report 1 January – 30 September 2015 slides (pdf) >
For further information:
Satu Huber, Managing Director, tel. +358 20 703 5811
Hanna Hiidenpalo, Director and Chief Investment Officer, tel. +358 20 703 5668
Sarianne Kirvesmäki, Director, Finance, tel. +358 20 703 5134

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