Clear improvement in result in the third quarter – Elo’s investment income increased to 3.7%

Elo Interim Report 1 January – 30 September 2016

• The return on Elo’s investment operations was 3.7 per cent for the period 1 Jan – 30 Sep 2016.
• At the end of September, the market value of Elo’s investments totalled EUR 21.3 billion.
• The solvency ratio was 24.5 per cent of technical provisions while the solvency capital exceeded the solvency limit by a factor of 2.0.

“The investment market performed strongly in the third quarter. The return from Elo’s investments improved significantly and was 3.7 per cent at the end of September. The return for the third quarter was 2.7%,” says Satu Huber, Elo’s Chief Executive Officer.

The European equity markets recovered quickly following the Brexit referendum and as a whole the global equity markets improved well in the third quarter, which had a clear impact on the result for the reporting period.

“The return from Elo’s equity investments rose to 4.0 per cent. All other asset classes also produced positive returns. The return from fixed income investments remained high as interest rates continued to decline. The real estate market’s return performance has been stable throughout the year and returns rose to 4.9 per cent,” says Hanna Hiidenpalo, Elo’s Director and Chief Investment Officer.

Emerging markets produce highest equity income

Equity market prices have remained quite high in all main markets. For the last few years money has continued to flow from active funds to index investments in the equity markets. The flow of cash to emerging market equities has also continued and the performance of the related investments has been strong throughout the year.

Elo’s listed equities yielded a return of 3.4 per cent (30 Sep 2015: 1.9). Regional diversification worked well within the portfolio. Emerging market equities generated the highest returns, at 9.4 per cent. Finnish equities generated a return of 8.1 per cent. Unlisted equities returned 4.6 (12.1) per cent and private equity investments 6.5 (18.7) per cent.

“In the main markets equity prices have remained rather high while corporate earnings growth has been low. Return expectations will remain moderate for a long time,” says Hiidenpalo.

Fixed income investments produce good returns

The moderate decline in the interest rates in industrialised Western countries that started in the summer continued in the autumn. Declining commodity prices and dwindling global economic growth have kept inflation below the central banks’ target level. The US Federal Reserve has repeatedly had to postpone the launch of its planned interest rate increases. The ECB’s corporate bond purchase programme is underway and has provided strong support to the corporate bond market.

In the reporting period, the total return from Elo’s fixed income investments was 4.2 (-0.2) per cent. Fixed income investments in the emerging markets returned 12.6 per cent and corporate bonds 6.5 per cent.

During the third quarter, capital flows to emerging market bonds were at a record level. The emerging fixed income markets performed well during the first half of the year and this continued in the third quarter. This is the result of investors seeking higher returns and the improved economic outlook in the emerging countries.

Real estate pays a stable return

Activity continued to be brisk and demand high in the real estate investment market, with especially housing portfolio transactions continuing to increase. They made up almost half of all transactions in the reporting period. In the period, Elo signed a letter of intent to buy some 1800 apartments in the Tampere and Turku areas.

Real estate made up 12.6 (14.2) per cent of Elo’s investments at the end of September. Returns on real estate investments were 4.9 (5.8) per cent.

In other investments, returns on hedge fund investments were 0.4 (2.2) per cent.

Economic outlook weaker towards the end of the year

While the global economy still showed signs of improvement in the early part of 2016, it is not likely to attain even 3 per cent growth this year. Growth is continuing to become more regional. In the euro area it has remained close to 1.5 per cent, in accordance with expectations. Finland's growth is close to reaching one per cent. The brisk level of construction is currently improving growth figures. Hopefully growth will also start in other sectors and investments will begin to increase.

“The uncertainty of the economic outlook continues to weigh heavily on the remaining part of the year. In the United States companies’ poor result growth, indebtedness and low level of investments suggest a cautious approach to the outlook. The extensive employment indicators used by the US Federal Reserve show that recovery in employment is coming to an end. Historically, these have been indicative of an approaching recession. This time, the Fed’s ability to stimulate the economy will be much weaker than before," Hiidenpalo says.

The euro area and Japan continue to struggle with structurally low growth. Long-term inflation is expected to remain very low, which means that nominal global growth is too small in relation to current levels of debt. The competitiveness of emerging economies has benefited as currencies have become weaker. The near future seems brighter for these countries because there will be more money available for monetary policy stimulus as the currency and inflation trends level off.

Elo Mutual Pension Insurance Company Interim Report 1 January – 30 September 2016 slides (pdf) >

Further information:

Satu Huber, Chief Executive Officer, 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