Operating environment, Interim Statement Q3/2023
Development of the global economy and of the capital markets is still marked by a high degree of uncertainty. Unusually strong inflation has prompted central banks to tighten monetary policy considerably, which is slowing down economic growth worldwide. The outlook for the rest of the year in Finland is weak, but the direction of the economy is expected to change next year.
The operating environment of the capital market has been challenging due to, for example, rising interest rates and 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 EU’s Sustainable Finance regulation guides 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.
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.
In the renewable energy business, the operating environment remained good, although the war in Ukraine, higher interest rates and inflation have all increased the costs of project development and project construction. The war in Ukraine has contributed to the acceleration of the green transition, but it has also created uncertainty among investors. The price of electricity has fallen significantly from the peak level of last year, but is still higher than in previous years, especially in Central and Southern Europe. The volatility of electricity prices contributed to increased uncertainty about future regulation and increased discussion on new support mechanisms that would increase investments in renewable energy.
The price of electricity has fallen significantly from the peak level of last year, but is still higher than in previous years, especially in Central and Southern Europe.
The real estate market continued to be challenging. Transaction volumes remained clearly lower than in previous years. The rise in interest rates was moderate in the third quarter, and the return requirements continued to show a slight rise. In the rental market, however, occupancy rates and rent levels remained good. The long-term fundamentals supporting real estate investments, such as urbanisation, are still seen as strong in the Finnish real estate market. Sustainability and impact will continue to be at the core of investment activities, and capital will increasingly seek out key locations and sustainable investments.
The general economic uncertainty and recession also affected the financial arrangements and timetables of the bioindustry operating environment. Planned funding rounds have stretched, and there is downward pressure on the valuation levels of investees. The poor availability and/or high price of some raw materials and tightened financing conditions of banks create pressure on the timetables and costs of projects of potential investees and investments.
In the European operating environment of Taaleri’s associated company Fintoil’s biorefinery in Hamina, the market situation remains 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 during the first nine months of the year. Inflation, rising interest rates and economic uncertainty kept consumer confidence low. The volumes of housing transactions and new mortgage loans raised decreased significantly from previous years, which affected the sales of residential mortgage guarantees. 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. Investment market performance was varied during the first nine months of the year. Equity prices increased, but on the other hand the continued increase in market interest rates depressed returns from fixed-income investments.