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Kimmo Koivurinne: Semi-cloudy start to 2023 – pension assets grow by 3bn

The assets used to finance Finnish occupational pensions grew by EUR 3 billion during the first quarter of the year. At the end of March, the assets amounted to EUR 241 billion. The stock markets generated a return in the first quarter in spite of the instability in the banking sector. During the first quarter, the mood on the markets was lifted by falling energy prices and the recovery of the Chinese market after a long period of restrictions.

In this blog post, I discuss the events of the start of 2023 on the financial markets in more detail. Our most recent asset information may be found on the Amount of pension assets page.

This year began on the financial markets in an uncertain mood, to say the least. At the beginning of January, investors were worried by central banks’ interest-rate rises, the impact of inflation on consumer purchasing power, energy shortages and slowing economic growth.

Kimmo Koivurinne profile.
Analyst Kimmo Koivurinne.

However, the prospects were not entirely negative. Central banks’ interest-rate rises had started to have an effect, and inflation had started to decline after a long gallop. Unemployment figures in the Eurozone continued to fall, and even China had begun to finally loosen Covid restrictions. In addition, the performance scenarios for the main asset classes had improved due to firms’ falling multiples of earnings and normalized interest-rate level.

Return from the stock markets in spite of banking sector instability

In the first quarter, banks continued their anti-inflationary interest-rate policy. As expected, the Fed raised its key rate twice during the quarter by 25 bps (0.25 percentage points). The key rate reached a level last seen before the 2008 financial crisis. The changed interest-rate climate in the US was devastating for banks with deficient interest-rate risk management. Silicon Valley Bank (SVB) in California had already faced problems and recorded billions of dollars of losses on its fixed-income investments last year. By early March, the losses had become insurmountable, and the Federal Deposit Insurance Corporation (FDIC) announced that it had been appointed receiver of the bank’s business. In the wake of the collapse of SVB, just a couple of days later, the FDIC was appointed receiver of another bank, Signature Bank, which had specialized in crypto currency deposits.

These bank failures naturally put investors on alert and made financial regulators even more vigilant. In mid-March, the Swiss bank Credit Suisse’s share price collapsed by almost a quarter in one day after an announcement by its major Saudi shareholder that it would not buy more shares in the bank. That same week, the Swiss National Bank issued a loan of CHF 50 billion (around EUR 57 billion) to secure continuity of Credit Suisse’s banking operations. In spite of the emergency finance, Credit Suisse continued to frantically seek a buyer. At the end of the week, Switzerland’s largest bank, UBS, announced it was buying Credit Suisse. The Swiss National Bank supported the deal and promised the newly merged bank up to CHF 100 billion in liquidity assistance. The deal cost around EUR 3 billion, in contrast with Credit Suisse’s market value of around 12 billion as late as February.

Fast interest-rate rises thus had dramatic consequences for banks that had neglected risk management or otherwise been in difficulties. A normalized interest-rate level has also caused other sectors grey hairs. For example, the traditionally heavily leveraged property sector has been forced to grapple with rapidly increased finance and material costs. All this notwithstanding, reasonable employment statistics in both the US and Europe, combined with firms’ results, lifted stock markets’ valuations during the quarter. The stock markets saw quite a steady rise, with the exception of Helsinki.

The underperformance of the Finnish stock market compared to Sweden, the rest of Europe and the US is a consequence of several factors. For one thing, the Helsinki exchange is strongly dependent on certain industrial sectors, such as technology, forestry and energy. If these sectors or the companies in them do not perform well, it negatively affects the stock market’s performance. Our economy and domestic market are more exposed than average to regional factors, such as geopolitical tensions, trade wars and the economic development of other countries, such as Germany. In addition, Finland’s population is one of the fastest ageing in the world, which does not create particularly good conditions for growth on the home market.