Uncertainty in financial markets characterised the beginning of the year
Elo Interim Report 1 January−31 March 2018
The mood in financial markets weakened during the first quarter of the year. Despite the rather positive economic situation, markets have been very nervous while tightening monetary policy and geopolitical and trade policy worries cast a shadow over the general outlook. Elo’s return on investments in January–March was -0.4 per cent.
The market value of Elo’s investments was EUR 23.3 billion at the end of March, increasing by EUR 214 million from the turn of the year. The solvency ratio was 124.7 per cent. Solvency capital was EUR 4,619 million.
“Uncertainty in financial markets grew and the mood weakened, which was visible in returns. On the other hand, the positive tone in the real economy continues, which is particularly welcome for both public finances and companies as well as for the pension system. The prerequisite for the proper functioning of the pension system is that Finns have jobs as well as possibilities for entrepreneurship and innovation,” says Satu Huber, Elo’s CEO.
Real estate investments and unlisted investments generated the best returns at the beginning of the year
Elo’s investments generated a return of -0.4 (2.9) per cent during the first quarter of the year. The market value of Elo’s investments at the end of March was EUR 23.3 billion. The average 10-year nominal return on Elo’s investments was 5.2 per cent and the real return was 3.9 per cent. The average 5-year nominal return on Elo’s investments was 5.6 per cent and the real return was 5.0 per cent.
The best returns on investments in January–March were generated by private equity investments with 3.1 (2.8) per cent and real estate investments with 1.2 (1.2) per cent. The return on hedge fund investments was 1.1 (1.2) per cent.
The real estate investment trade continued briskly at the beginning of the year, after the record numbers achieved last year. The interest of international investors in the real estate markets in Finland also remained strong. The new net return requirements are at a record low level, and the positive development of rents is expected to continue in growth centres, particularly in residential and office properties. The positive economic development has decreased the number of vacant facilities, but there are still plenty of office spaces available, for example, in the Helsinki Metropolitan Area.
Finnish and emerging market equities achieved the best relative returns
Return on listed equities was -2.0 (6.8) per cent. Return on Elo’s fixed income investments was -0.5 (0.9) per cent. The US dollar weakened by 2.5 per cent against the euro at the beginning of the year. A significant share of Elo’s currency risk was hedged.
“The development of the equity markets has been rather nervous after the good start during the first weeks of the year. However, all in all, the equity markets have kept up rather well in these demanding conditions. There have been regional variations and both Finnish as well as emerging market equities achieved the best relative returns at the beginning of the year. There was a good exposure to these markets in the portfolio,”says Hanna Hiidenpalo, Elo’s Chief Investment Officer.
“Despite increased uncertainty, Elo’s investments have held up reasonably well at the beginning of the year. Earnings outlook for companies has remained rather positive at the beginning of the second quarter,” continues Hiidenpalo.
Economic growth remained strong – near-term growth outlook is somewhat more moderate
Global economic growth remained strong during the first quarter. However, there are indications that the growth reached its cyclical peak at around the turn of the year. The basis for growth is now positively broad as the OECD economies are growing steadily and many large emerging economies have reached a better growth stage.
The pay and inflation expectations in the United States have grown at the beginning of the year and, at the same time, they have caused nervousness in the investment and equity markets. Expectations have calmed down during the spring, and long-term reference rates have even been slightly in decline in recent weeks.
“The near-term outlook for economic growth continues to be positive, but the normalisation of monetary policy and the geopolitical and trade policy uncertainties weaken the economic and market outlooks. Expectations for global economic growth have risen slightly since last year, but they may prove to be too optimistic,” says Hiidenpalo.
“Economic development in Finland appears to be stable for the near future. Following the growth, the increase in employment rates would be essential for the long-term development of our national economy and society,” adds Hiidenpalo.
The number of old-age pension decisions decreased by 30 per cent at the beginning of the year compared to last year
Elo issued a total of 6,478 (7,486) pension decisions on the basis of applications during the beginning of the year. A total of 1,743 (2,639) old-age pension decisions were issued in January–March. The age at which retirees are eligible for old-age pension rose for the first time at the beginning of 2018 in accordance to the pension reform, and now stands at 63 years and 3 months. The gradual increase in the pensionable age affects the applying for old-age pensions in a new way, and a clear slump will be apparent in the number of applications. Therefore, the increase in the pensionable age has caused the number of pension decisions to fall by more than 30 per cent when compared with the same period last year.
The number of decisions related to the partial early old-age pension, which is a new type of pension introduced by the pension reform, has started to stabilise after a peak at the beginning. Several age groups applied for the partial early old-age pension at the same time during the corresponding period last year. At the beginning of 2018, a total of 593 (956) partial early old-age pension decisions were issued, which is nearly 40 per cent less than in the corresponding period in 2017.
The picking up of the economy and the success of Elo’s customers were visible, for example, in the strong increase in Elo’s premiums written in 2017. Elo strengthened its position also during the first two transfer periods between employment pension insurers this year, in which the TyEL insurance contribution increased by EUR 2.7 million.
In the reported asset class-specific returns on 31 March 2018, the return on foreign currency hedges is estimated relative to the foreign currency-denominated assets on the reporting date.
CEO Satu Huber, tel. +358 20 703 5811
CIO Hanna Hiidenpalo, tel. +358 20 703 5668
CFO Sarianne Kirvesmäki, tel. +358 20 703 5134