In 2017, Ilmarinen’s investments yielded excellent returns of 7.2 per cent. How successful was the investment year and what are your expectations concerning this year, Ilmarinen’s CIO Mikko Mursula.
What was 2017 like in terms of investment operations?
The year was excellent. Equity investments performed extremely well in all the main markets, partly due to exceptionally good economic growth. Over the course of the year, most economic forecasting institutions raised their economic growth forecasts more than once. Thanks to the strong economic development, companies were able to improve their earnings and increase their net sales. The equity markets rose practically throughout the year, with the exception of a few hiccups.
Where was Ilmarinen most successful?
We were successful in our selection of equities and sectors. We were also able to read the development of stock prices fairly well and we built up successful hedging. Our overall allocation based on a long-term investment strategy worked well as a whole.
Were there any surprises last year and what could you have done differently?
There is always room for improvement. One of last year’s surprises was that the interest rate level did not make an upward correction as expected.
A year ago the markets were full of talk about political risks. Did they materialise?
Now, it is safe to say that they did not. For example, the results of France’s election were very market-positive. The worst fears concerning the United States’ new administration did not materialise from the markets’ viewpoint, although it did not make any major decisions.
What are your expectations for this year?
The first weeks of 2018 have already featured rising interest rates in both Europe and the US. Fixed income market development will be one of the key issues this year as well and a lot of focus will be placed on the actions of the main central banks. The Fed is expected to continue tightening its monetary policy, the ECB will likely end its stimulus measures this year and Japan’s central bank is expected to continue its low-level stimulus policy. The central banks are thus operating in different types of cycles and the fixed income markets are showing clear signs of nervousness.
What kind of movements will take place on the equity markets?
The global economy is expected to show brisk growth in all the main markets. Companies’ earnings are also expected to grow by more than 10 per cent on average during the year. Despite rising inflation, the market still believes that companies are capable of improving their earnings by growing their net sales. The equity markets’ valuation level has long consisted of companies needing to improve their earnings to maintain their current valuation level. But if economic growth and companies’ earnings improvements continue as predicted, the equity market may still continue to move upwards. Due to the lengthy continuation of the rise in prices and low volatility, investors should prepare for clearly greater market volatility than before, no matter what the asset class.
Are real asset classes still interesting to investors?
Yes they are, but price critically. It has been obvious over several years that the historically low interest rate level, in absolute terms, has steered money to lower liquidity asset classes. In places, the prices of real estate and different infrastructure investments have risen very high, which brings down long-term return expectations.
How has Ilmarinen prepared for possible changes in the investment environment?
For several years, Ilmarinen has maintained a low interest rate risk, or duration. A bigger question is what kinds of impacts a rise in the interest rate would have on other asset classes. A sudden surprising rise in the interest rate would probably be bad from the perspective of almost all the risky asset classes, while a predictable, steady interest rate rise would not necessarily have the same effect.
As a whole, Ilmarinen will continue its investment operations within the guidelines of its long-term investment strategy. We are still interested in adding investments to the real asset class if the price is right and the criteria for return-risk expectations are met, and the weight of fixed income investments can be reduced correspondingly.
What effect will Ilmarinen’s and Etera’s merger have on investment operations this year?
We combined our investment portfolios at the beginning of the year, which was a success, despite the project’s massive scale. We are now managing a consolidated balance sheet and close to EUR 46 billion in investment assets in accordance with Ilmarinen’s investment strategy. Thanks to the merger, Ilmarinen’s standing on the Finnish real estate markets is even more significant, both as an investor and a developer.
Read more about Ilmarinen’s investment result.