It has been a decade since the financial crisis, which started from the US housing market, began to send shockwaves through the global economy. Although signs of the budding crisis existed well before September 2008, many identify the bankruptcy of Lehman Brothers as its zero hour. What followed was the global breakdown of trust between banks as well as the collapse of many banks and funds. In the US, many lost their homes, pension savings and jobs.
The chaos began to settle down when central banks and governments rushed to the aid of the troubled banks. Finnish banks survived the crisis largely unscathed and none required help from the State. In Finland’s earnings-related pension sector, legislation concerning pension companies was changed to respond to the crisis. The pension companies were spared from being forced to sell Finnish shares, which would have only sped up the fall of the exchange rates.
The crisis was reflected in real economy for a long time after, and new crises were on the way. One of the most significant ones is perhaps the 2010 European debt crisis, which caused many to consider a potential disintegration of the eurozone.
However, the difficulties of real economy and the employment situation did not affect investment results on the same scale. The investment market recovered fairly quickly, and the time after the crisis has treated investors well. In 2009, the market already provided record returns. Here, the stimulative monetary policy of central banks has been a key factor. With interest rates at 0% or even lower, large investors have acquired shares and other investments which have provided good returns. That said, companies’ investment activity did not pick up in the same way.
However, the current cycle is approaching its end, and return expectations are more modest. Pension companies must also prepare for lower returns. At Elo, we continue to diversify our investments in several types of investment instruments on the international market. Risk management in the earnings-related pension sector has also developed greatly.
Stricter regulation and sharing learnings with the new generation
Many ponder what has been learned from the 2008 crisis and whether it is possible to avoid such crises in the future. Regulation of key large banks has become notably stricter, making risk management in the finance sector more robust. For instance, the solvency of banks now stands on a much stronger basis.
While on the topic of the future and development after the crisis, it’s good to also consider the human element. Since 2008, an entirely new generation has started working in the finance and asset management industry. Young employees, who were still students during the crisis and immediately after, are now building their skills and experience.
It is therefore highly important that those who worked in the industry during the crisis cross paths with this new generation. When investment decisions are made in teams, where diverse experiences and points of view come together, it is possible to ensure that the lessons of the financial crisis – and even those of earlier market crises – aren’t forgotten.
Economies find their way out of crises
I believe that the current cycle will continue on a positive track for a couple of years more. However, concerns have begun to accumulate. The economic growth is about to reach its peak for now or has already reached it. The China–United States trade war and Brexit are affecting the eurozone, potentially in ways that haven’t yet been predicted. In addition, central banks with the Fed at the forefront will begin to tighten monetary policy. As a result, the US dollar will strengthen and US dollar-denominated liquidity will weaken, which won’t bode well for emerging economies with dollar-denominated debt.
Worrying over future crises is understandable. As the Chief Investment Officer of an earnings-related pension company, I like to bring the conversation back to the long term: the responsibilities of a pension investor extend decades into the future. This must be reflected in the planning of long-term investing, with appropriate consideration to economic cycles.
The only sure thing is that crises will happen in the future, and their timing may surprise us. Economies are flexible and they find their way out of crises. Although the world still hasn’t fully recovered from the 2008 crisis, things are looking much better.
At Elo, we continue to use and polish best practices. A responsible, results-driven and prudent investor endeavours to know its investments – before the decision to invest and also as the investment’s business and operations change and develop. This requires the investor to commit time and effort to its own analysis. Fortunately, we are living in a time where a pension investor has more data at its disposal than ever before.
Additionally, a strong partner network supports our own expertise and experience. This allows us to operate better and more systematically, and to ensure that we don’t look at the investment market and investments themselves solely based on our understanding.
From this position, it’s good to move forward – into the next ten years and further.
Hanna Hiidenpalo, Elo's Chief Investment Officer