August and September have always been months with higher than average volatility on the securities markets. To some extent, this can be explained by the holiday season, when market turnover is lower and an unforeseen event may have greater influence on the price of securities than usual.
This year, the event was President Trump’s decision to launch a sudden attack in the trade war with China. The financial world was not prepared for such a move, thus causing most of the biggest stock markets to decline in the first half of August.
However, as August progressed, turmoil on the financial markets and insecurity in the real economy, caused by the trade war, flamed the expectations of investors regarding the US Federal Reserve once again being forced to lower interest rates. I think that it is naive to hope that the trade tensions between the US and China will be resolved in the near future with a simple handshake between the leaders of the two countries. The US simply does not accept that there is another country that is economically more powerful than itself.
I suspect that one wave of globalisation is over for the time being and the rest of the world’s countries may now be forced to choose whether they want to belong to the block led by the US or China. It is likely that international companies will have to reorganise their supply chains and there will be both winners as well as losers in this process.
Pension funds as important providers of capital
Over the last few years, the investment strategy of LHV’s pension funds has increasingly focussed on finding local investments. The amendments to the Investment Funds Act, which entered into force on 2 September, provided new impulses for doing so.
Currently, the team at LHV has targeted projects amounting to EUR 511 million (real estate, bonds with a high rate of return, i.e. in excess of 5%, holdings in private companies and private equity funds) that are worth investing in. The high level of uncertainty about the future of the 2nd pension pillar leaves us, as the managers of pension assets, with a question: how many and which of these projects can be realised.
Having said that, over the last four years, investments by Estonian pension funds into the Estonian economy have increased within the same scope as the corporate loan portfolios of banks operating in Estonia – EUR 466 billion and EUR 469 billion, respectively. Although only a portion of the Estonian investments by pension funds are in the form of bonds (similar to loans), the pension funds have become important providers of capital on the Estonian market for growing companies. Accordingly, the pension funds offer an alternative to bank financing as well as funding options that are more similar to equity.
It is quite likely that if Helir-Valdor Seeder, Urmas Reinsalu and their donor Parvel Pruunsild had managed to destroy the 2nd pension pillar a couple of years ago, then given the situation where several Scandinavian banks are leaving our market, the funding possibilities of Estonian companies would be even more meagre and loan margins even higher than they are today.
I am completely bewildered having heard the claims of the politicians of the Pro Patria Party that we don’t even need (domestic) capital. I guess they assume that foreigners will build factories for us and hire Estonians. The ideologists of Pro Patria preach that the people should spend everything they earn – that the expenditure of one person is the income of the other; that if you spend everything, all of that money will remain in the economy and will not be parked in some funds.
One may hate the banks however, if one day there aren’t any left or there are fewer than there once were, lending costs will skyrocket as a result, as we have seen with the departure of three large Nordic banks. Theoretically, one could claim that we don’t need banks and that people and companies could lend to each other without banks mediating it, but would it really be more efficient and cheaper? Today probably not.
Looking at the investment projects currently in the focus of LHV’s pension fund team, it must be admitted that, as a private investor, investing in any of them at the moment is likely impossible. The question is not even about knowledge or experience, but in access and scope. Five years ago, LHV’s pension funds would also not have been able to place funds in these projects as we were simply too small to solve the financing needs of even a medium-sized company.
Buying shares on stock exchanges in essence means refinancing some other investor, and generally, this money will not be used for financing new projects or hiring employees. Estonia needs more, and not less capital. But capital arises only if we spend less than we earn and when the saved income is put to work productively. Saving, investing and creating something new are the activities that result in development and innovation, not consumption.
August and September have always been months with higher than average volatility on the securities markets. To some extent, this can be explained by the holiday season, when market turnover is lower and an unforeseen event may have greater influence on the price of securities than usual.
