Operating environment, Interim Statement Q1/2023

Development of the global economy and of the capital markets is still surrounded by a high degree of uncertainty. Unusually strong inflation has prompted central banks to tighten monetary policy considerably, which has increased the likelihood of a recession.

The operating environment of the capital market has become more challenging due to, for example, rising interest rates and strong inflation. The growth of alternative investments has slowed, but the asset class has become a significant part of the portfolios of institutional investors, as it offers the opportunity to diversify risks and smooth out returns. The decline in the values of listed investments has increased the share of illiquid products in the portfolios of institutional investors, which may affect their short-term allocation. At the same time, the EU’s Sustainable Finance Disclosure Regulation is guiding both investors and financial actors towards sustainable investments. In particular, more private capital will be needed in the future to achieve the global emission reduction, energy self-sufficiency and circular economy targets.

Infrastructure assets under management ($bn) by primary region focus, 2010-2027F

 

Europe’s desire to break away from Russian energy sources and to increase its self-sufficiency will strengthen the operating environment for renewable energy and bioindustry, in particular.

The price of electricity has fallen significantly from the peak level of last year, but it is still higher than in previous years

In the renewable energy business, the operating environment remained good, although the war in Ukraine, higher interest rates and accelerating inflation have all increased the costs of project development and project construction. The price of electricity has fallen significantly from the peak level of last year, but it is still higher than in previous years. In the autumn, the Council of Europe adopted a regulation on temporary emergency measures in response to the energy crisis and the exceptional rise in energy prices. The regulation, which includes a temporary cap on market revenues and a solidarity levy, has been applied in different ways in different countries. In March, the Finnish Parliament approved an act on temporary profit taxes in electricity business and fossil fuel business for the tax year 2023. According to Taaleri’s assessment, the impacts of the Finnish model are not significant for Taaleri’s business.

In the real estate business, the rise in interest rates has caused uncertainty in the market. Transaction activity slowed down significantly at the end of last year and remained low during the review period. The rise in interest rates has caused the yield requirements to rise, and thus the values to fall, especially in the real estate segments and properties of the lowest yield claims. However, occupancy rates have remained good in both the housing and commercial properties markets.

The long-term fundamentals supporting real estate investments, such as urbanisation, are still seen as strong in the Finnish real estate market. The nature of the real estate market is characterised by the cyclical nature of the sector. For long-term investors, the opportunities offered by the current economic situation can offer better returns in relation to the average return over the cycle.

In bioindustry business, both investor interest and the activity of potential investees remained at a high level during the review period. The poor availability and/or high price of some raw materials, tightened financing conditions and energy prices affect the timetables and costs of short-term projects of both potential portfolio companies and of investees. The outlook for the long-term operating environment of the business is very good, although the general market uncertainty naturally affects it as well.

In the European operating environment of Taaleri’s associated company Fintoil’s biorefinery in Hamina, the market situation is still tight, but the prices of raw materials have already started to fall in North America.

The operating environment of Garantia Insurance Company Ltd’s insurance operations was sluggish in the early part of the year. Inflation, high market interest rates and economic uncertainty kept consumer confidence low, which led to a decrease in the volumes of housing transactions, mortgage loans raised and guaranties underwritten compared to previous years. However, the creditworthiness of the company’s consumer and corporate customers remained good, and no material changes occurred in the risk position of the guaranty insurance portfolio. In the early part of the year, the development of the investment market was positive, the rise in market interest rates levelled off and stock prices rose, which improved the net income from investment operations.