Unexpected start to 2016 challenged investors worldwide

Elo Interim Report 1 January – 31 March 2016

• The return on Elo’s investment operations for 1 January – 31 March 2016 was -0.4 per cent.
• The total value of investment assets at the end of March was EUR 20.7 billion.
• Solvency remained at a secure level. The solvency ratio was 22.6 per cent of technical provisions, and the solvency capital exceeded the solvency limit by a factor of 2.0.

The 2016 investment year began in extremely negative mood from the very start of January. Economic growth appeared to be slowing everywhere, contrary to expectations. There was particular concern over China’s economy, the weakness of Europe’s bank sector and the fall in oil prices. Risk avoidance by investors led to a sharp drop in equity markets globally up to mid-February. Central banks on different continents continued expansionary monetary policy, and in the latter part of February the equity markets began to recover.

Global economic growth dependent on private consumer demand

Slow economic growth globally at the start of the year was accompanied by a decline in industrial production. The nervousness on China's capital and currency markets made the situation worse. International trade is barely growing and the investment appetite in industry worldwide has long been so low that it is beginning to depress future growth levels.

Private consumer demand has nevertheless kept global growth at a moderate level, due in part to the low price of energy. The expectations on global growth in 2016 have been reduced significantly since the start of the year, especially as a result of the diminished growth in the United States and Japan. Growth expectations for the euro area have held the best, but they are still quite low at around 1.5 per cent.

Expectations concerning inflation are still at a historic low. The United States is on a slightly higher inflationary path than other economic regions. In Japan, fears of deflation have again begun to emerge. For the fifth successive year, inflation expectations in the euro area are below the two per cent level targeted by the ECB, and the long-term annual inflation projection is below one per cent. The policies of central banks are diverging from each other on account of the differences in inflation outlooks. The US Federal Reserve has already begun to tighten its monetary policy, while other central banks’ monetary policy is still expansionary. This is causing uncertainty on the investment markets.

Positive returns from fixed income investments and real estate

Despite strong currency fluctuations and the poor return on listed equities, the overall return on Elo’s investments in the first quarter was only fractionally negative, at -0.4 per cent.

“The movements in investment markets at the start of the year were considerable in nearly all asset classes. Interest rates on government bonds fell significantly in the euro area and in the United States, which boosted Elo’s interest income,” explains Elo’s Chief Investment Officer, Hanna Hiidenpalo.

Expectations of a rate hike by the Fed towards the end of 2015 faded substantially. At the same time the US dollar weakened against nearly all currencies while the euro strengthened about five per cent against the dollar. Returns on Elo’s fixed income investments in the first quarter totalled 1.5 per cent.

First quarter trading on corporate bond markets was very quiet and there was a significant widening of the credit margins paid by companies on bonds. The situation nevertheless became considerably more positive in March after the ECB’s announcement of a corporate bond purchase programme. The amount of Elo’s credit risk investments was increased during the first quarter. The return on these credit risk investments was 1.9 per cent.

“The start of the year was relatively steady in Elo’s other investments, and the rapid price fluctuations in listed investments did not affect the returns obtained. Real estate investments proved the busiest, and we sold 10 sites to foreign funds for almost EUR 200 million. Elo’s real estate investments returned 1.6 per cent,” says Hanna Hiidenpalo.

Future outlook indicates slight recovery, but economic growth expectations still low

“The economic outlook for the remainder of the year currently seems better than it did amid the negative sentiment at the start of the year. It finally looks like the Finnish economy has turned the corner, and so we expect to see growth materialising in the latter part of the year,” explains Elo’s Chief Executive Officer, Satu Huber.

Encouraging news for the global situation is emerging in China, for example, as it appears to have succeeded in stabilising its economy at least for the time being. The closely monitored industrial outlook has recently picked up, with the exception of Japan, and consumer confidence has remained at a reasonably good level. The near-term risks regarding the economic outlook and the investment markets are still connected with such factors as the lack of stability in oil and other raw material prices and in the emerging market economies, as well as the divergence in central bank policies and the United Kingdom’s forthcoming EU referendum.

Low oil prices and highly expansionary monetary policy will aid economic growth, but, due to long-term structural factors such as indebtedness, overcapacity, demographic trends and major technological changes, the global economic growth for the remainder of the year will probably be low at best, at around 3 per cent.

Elo Interim Report 1 January – 31 March 2016 (PDF) >

Further information:

Satu Huber, Chief Executive Officer, tel. +358 20 703 5811
Hanna Hiidenpalo, Chief Investment Officer, tel. +358 20 703 5668
Sarianne Kirvesmäki, Director, Finance, tel. +358 20 703 5134