SEB Investment management the chairman of the board, Jānis Rozenfelds, begins his analytical examination with the axiom that the financial market without advantages and disadvantages is unthinkable: without significant declines, there would not even be significant increases.
He says: we can observe this “swing” very well over the past five years, when a good year is followed by a bad year and vice versa. The years 2018 and 2020 were not pleasant, while 2019 and 2021 were quite positive. If we assume that such a chain of good and bad years will continue, after the unsuccessful year 2022, the next one should be good. The good news is that, despite these fluctuations, the long-term results of Latvia’s second-tier pension plans are generally positive over both 10 and 15 years.
We can observe the same trend in global stock market indices, both in the US and in Europe. Over the past five years, each year has seen vastly different price dynamics and directions, but the long-term trends are positive. (Source: USA SP 500 stock index over the last five years.)
It is precisely the sharp turns of events that have become the visiting card of the last five years. For example, if we look at the period 2011 to 2017 in Latvian level 2 pension plans and compare it with the last five years, we can see that the change in direction and momentum has been much less impressive.
And again, the good news: Longer-term, everything is on the upswing.
The differences between the last and the previous five years can be explained by the importance of the events which contribute to the fluctuations of the financial market. The last five years have been more eventful, which has helped accelerate fluctuations in the financial market in both directions. Here are some examples.
In 2018, the then President of the United States, Donald Trump, tried to change what had been in place for some time the status quo in trade relations with China, for which the 4th quarter of 2018 was one of the worst of the decade.
The whole world spent 2020 trying to reduce the impact of Covid-19 on the economy and on health. Although the financial markets recovered at the end of the year, we experienced a sharp decline at the beginning.
On the other hand, the year 2022 began with a rotation of industries – the pandemic-era turnaround for tech company stocks was halted – and continued with the Russian invasion of Ukraine. At the same time, central banks significantly changed their policy, raising key interest rates to curb high inflation. The result – almost all year, with the exception of March, July, October and November – was negative.
It must be admitted that the period from 2011 to 2017 was much more “dull” in financial markets, without such significant events as in the last five years. Therefore, during this period, the ups and downs were less expressive and the trends were longer.
Looking at the forecast for 2023, there is no reason to believe it will be successful just because 2022 has not been successful. Many of the big questions that have affected financial markets in recent years remain unresolved.
However, the 4th quarter of 2022 bodes well, because: two months out of three were positive for shares; sharp rise in bond rates could encourage higher yields in the future; there are signs that inflation is starting to come down a bit.
Western countries’ support for Ukraine is also increasing, and Europe’s dependence on Russian energy resources is decreasing (the relatively warm climate also helps here).
Even the relationship between the euro and the dollar has “normalised” in a certain sense.
“As another positive factor, I would like to mention that pension managers are increasingly making investments with added value, for example investments in Baltic companies and infrastructure, investments in Latvian forests and investments aimed at sustainability. These are trends that have developed gradually, but they are definitely here to stay”, the expert concludes his review, wishing all who read it a successful 2023.
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