Operating environment, Half-Year Report H1/2024
Developments in the global economy and capital markets were more positive than expected in the second quarter of 2024, especially in the United States. In Europe, the development has been more moderate, and the economic signals have weakened during the summer. As inflation has slowed, upward pressures on interest rates have levelled off. As expected, the European Central Bank started lowering interest rates in the summer, and the first interest rate cuts in the United States are being priced for the autumn. The employment situation has softened slightly in both the eurozone and the United States, further containing inflationary pressures. Stock market uncertainty may increase in the United States as the presidential election, held in November, approaches.
Alternative investments have become an established component of institutional investors’ portfolios, as they provide an opportunity to diversify risks and smooth out returns. However, growth in the asset class has slowed, and the fundraising environment remained challenging also in the second quarter of the year. The picking up of the M&A market would increase distributions to investors, which in turn would allow investors to commit capital into new private assets funds.
Several economic megatrends that support Taaleri’s operations continue to be strong. In particular, more private capital will be needed in the future to achieve the global emission reduction, energy self-sufficiency and circular economy targets. The EU’s Sustainable Finance Disclosure Regulation (SFDR) strengthens the position of sustainable investments. However, in the short and medium term, the market’s pricing mechanisms and political decisions may have a negative impact on demand and profitability.
In the renewable energy business, the operating environment remained good overall, although Russia’s war against Ukraine, the previous rise in interest rates and inflation have increased the costs of project construction and operation and created uncertainty among investors. In Eastern Europe, new support mechanisms have been launched to accelerate investments in renewable energy. While Europe has succeeded in reducing its dependence on Russian energy, the price of energy is still quick to react to changes in the global market. The price of electricity has fallen from last year’s levels but remains generally higher in Central and Eastern Europe compared to previous years. The decline in electricity demand experienced in Europe in 2023 has halted, and consumption in the EU area was slightly higher in the second quarter than in the previous year.
In particular, more private capital will be needed in the future to achieve the global emission reduction, energy self-sufficiency and circular economy targets
The prolonged softer economic cycle has prolonged the implementation of financing arrangements and influenced the schedules of ongoing and planned projects in the operating environment of bioindustry. This has also increased variability in the valuation levels of portfolio company funding rounds. The poor availability and/or high price of certain raw materials and geopolitical tensions create uncertainty, which also temporarily slows down the emergence of new products and solutions based on the circular economy and bio-based materials. However, there are signs of a positive turnaround in the operating environment, and in the long term, sustainability elements are expected to guide customers’ decision-making even further.
The prices of EU emission allowances that affect the demand for bioindustry products rose during the second quarter, and futures indicate upward pressures. However, the overall price level remains moderate. The price level of coal has fluctuated in response to general economic uncertainty and the geopolitical situation, but it is significantly lower than the record levels of 2022. The prices of domestic pulpwood and fuel wood have risen sharply since the beginning of the year, reaching a record high. This is due to a decrease in supply after the end of Russian imports and an increase in the use of wood for energy.
In the real estate market, the second quarter was moderate in terms of activity but showed an upward trend compared to the first quarter of the year. Buyers and sellers’ perceptions of the pricing of assets have converged, boosting transactions. However, transaction volumes were lower than in the second quarter of last year. International investors represented about half of the total transaction volume.
In the operating environment of Garantia Insurance Company Ltd’s insurance operations, economic uncertainty kept consumer confidence significantly below the long-term average and the activity in the housing markets remained low. The continuing low volume of housing transactions significantly affected the company’s sales of residential mortgage guarantees. In Finland, the prolonged weak economic cycle was also reflected in a slight increase in unemployment, but the creditworthiness of the company’s residential mortgage guarantee customers largely remained good, and no significant changes occurred in the risk position of the guaranty insurance portfolio. The housing market is expected to recover in the medium term, which will have a positive effect on Garantia’s residential mortgage guaranty sales.
As a result of subdued economic activity, companies’ willingness to invest has remained low and the number of bankruptcy filings have continued to rise. The demand for corporate financing has remained modest but in general, the credit worthiness of corporate counterparties in Garantia’s insurance exposure has remained stable. Development in the investment market has been strong during the first half of 2024.