SEB Bank offers its subsidiary SEB Investment Management board chairman Jānis Rozenfelds’ view on how Latvia and the biggest world economies have passed these first three quarters and what can be expected from the future.
The following text is the expert’s opinion.
Financial markets passed first three quarters of this year mostly calmly if we compare it to the same period of last year. This does not mean that it was a boring time for investors, pension managers included. It was the opposite – this year we have experienced and observed various unusual or long-forgotten processes, both negative and positive.
They affected pension plans in Latvia as well. It should be stressed that the situation for 2nd level pension plans in Latvia is much better than it was last year. Some plans have already managed to recover last year’s losses.
At the end of Q3 – around the middle of September – both US and European stock markets experienced drops,
making September the lest successful month this year.
We can see this decline reflected in the short-term in our pension plans. Nevertheless, October started off more calmly for financial markets despite the Israel-Hamas conflict’s resurgence. Over the course of a single month we have seen both the highest point for multiple pension plans and the least successful month of this year so far.
What caused this activity on financial markets and what can we expect from Q4?
Europe’s biggest economy – Germany – is looking for a new breakthrough.
The European stock market started the year with growth, which turned out more rapid than in the US. However, as the year went on, this growth kept slowing down. In summer was could see a slight drop of stock indexes in Europe. Generally the year has been good for Europe so far, because, looking back at the year, stock indexes show positive results.
It was largely dictated by Europe’s ability to unexpectedly quickly resolve the energy market challenges of last year. At the same time, it is important to keep in mind that Europe remains a major importer of energy resources, and the high energy prices, especially at the start of the heating season do not assist with global competition.
This means that although the first three quarters were good for Europe, I cannot say we are in calm waters now. This is where it is worth mentioning one of the long-forgotten events: Germany, Europe’s biggest economy, is currently in search of a way to “keep on living”.
The export-focused economic model employed by Germany so far was successful, but now it’s taken a serious pause. The refusal to keep using nuclear energy has created a tangible deficit of energy resources. This means Germany needs to look for new sectors with growth potential and which could serve as the next driving force of the economy.
It is also worth mentioning that we can see serious challenges in Sweden’s real estate sector, which may have an effect on Baltic States and their construction sectors.
US slowing down – is there a recession on the way?
US economy is fairing better than Europe’s at the moment. However, there are signs of slowdown. After the growth experienced by the US market at the start of the year, now there is a moderate stock price drop. Currently I see no major reasons for concerns: the baseline scenario does not predict a serious recession, rather a temporary deterioration of the results or a “soft landing”, which may endanger investor sentiment for a while.
Like in the US, the European Central Bank carefully follows developments in their countries’ economies. If they see some worsening of the situation, their respective central banks adopt changes to their positions. So far central banks have made numerous decisions to raise interest rates in an effort to limit inflation. Raising interest rates is one process that has not been seen in a long time.
What will the final quarter bring?
As for interest rates, it seems we can see a ray of hope ahead – currently it is predicted that next year raising of interest rates may discontinue or even go down. It would be a positive change that could bring some optimism to financial markets.
At the same time, October also brought tragic events in the Middle East, which affect the price of gold and oil. It is difficult to make predictions about the situation’s influence on global stock markets because everything depends on how it develops – whether or not it explodes into a larger regional conflict.
Also read: Latvian president: we have all kinds of possible scenarios to consider
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