At the moment, there is a decline in the financial market, which significantly affects not only different types of savings all over the world, but also the results of level 2 and level 3 pension plans here in Latvia.
Although the results of pension plans are fine in the long term (they are positive and beat inflation*), the first half of 2022 has caused various discussions in the public space. The reasons why the results of pension plans have not improved in the second quarter of this year are the same ones that swayed the market in the first quarter: Russia’s invasion of Ukraine, high inflation, sector rotation, as well as central bank decisions that change the “rules of the game” in the financial market. They have been joined by concerns about a possible recession.
These issues are difficult and will not be resolved in a week or a month. Maybe it will take even several years. But often, looking only at the big picture, we can miss individual details and trends. In this article, I would like to point out the positive aspects that can be observed in the financial market:
1. Local investments in the Baltics can provide good results even in conditions when the whole world is living in conditions of war, sanctions caused by it, high inflation and illness with Covid-19.
Evaluating SEB’s pension plan portfolios, I can conclude that the first half of this year has been successful for alternative investment funds working in the Baltics, such as real estate funds, forest funds and infrastructure funds. This is a direction that must be continued and developed, as it not only gives the rest of the portfolio that invests money elsewhere, but also gives a positive boost to the Baltic economy and makes sustainable investments close to home.
It is positive that we are also strengthening local investments at the level of regulatory acts. Namely, starting from 2022, pension managers may invest up to 15% of assets in venture capital and real estate funds, which can be increased up to 25% by fulfilling several conditions. It is a very proportionate proportion, which already gives a tangible result.
2. In the long term, it is possible to earn more with bonds than in recent years. In recent years, we have lived in the financial market after the following events – “if you want to make money, then take more risk and invest in shares”. This explains the popularity of stocks, because by taking some risk of volatility, you could earn more. Shares provide the opportunity to make a profit in the long term, but in the short term they have their own characteristics – they grow in value quickly and lose value just as quickly. As an example, I can mention the year 2019, which was fantastic in the financial markets. That year, the yields of pension plans were also very pleasing – a number of them exceeded the +10% mark, and several even exceeded the +20% mark. The year 2021 was also very positive for shares and with very similar trends.
On the other hand, the first half of 2022, especially the second quarter, marks a different picture – “neither higher nor lower risk saves from short-term losses”. Both stock and bond prices fell. However, bond yields are now much more “attractive” than they were a year or even six months ago. This means that in the future it will finally be possible to start earning more with bonds again, taking potentially less risk. However, for this trend to be positively reflected in pension portfolios, time must pass – both when buying new bonds and restructuring the existing portfolio.
3. This is an excellent time to start saving or increase your regular contribution. One of the basic principles of successful investing is “buy when the market is down; sell when the market is up’. If we apply this principle also to pension savings, then now is a very good time to make contributions – start saving or increase the contribution. It can be compared to buying goods at a time when there are discounts. It is difficult to predict how long it will take for the markets to recover. The fall in the financial markets is significant – for example, the SP500 index (USA) has the fourth worst start of the year in almost 100 years.
There is active debate in the financial world as to whether the fall for the stock category may have bottomed out. Therefore, in the coming months, we will hardly be able to observe a rapid recovery, as was the case when overcoming the downturn during Covid. Stocks should be expected to recover more slowly. Bonds are likely to recover at an even slower pace than stocks, as central bank policy predicts even higher interest rates in the future.
In summary, we are currently experiencing a so-called “bear market”, which is driving the market down in the short term. A number of indicators cause concern – possible recession, availability of raw materials, inflation and other factors, not to mention the potential development of Russian aggression. However, let’s not forget that there are also several positive trends, the fruits of which we will appreciate years from now. The main thing is not to lose the long-term perspective, make regular contributions and choose financial services suitable for your level of risk tolerance.
*Source: manapensija.lv
–
