Operating environment, Financial Statements Bulletin Q4/2023
Development of the global economy and of the capital markets was still marked by a high degree of uncertainty in late 2023. Interest rate increases during the year curbed strong inflation, and the US and European central banks stopped their interest rate increases during the second half of the year. According to the prevailing market view, 2024 will bring a soft landing; the economy will slow down moderately while avoiding a more serious recession, and interest rates will start to decline in 2024.
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 construction. The war in Ukraine has contributed to the acceleration of the green transition, but it has also created uncertainty among investors. While Europe has succeeded in reducing its dependence on Russian energy, the price of energy is very sensitive to changes in the global market. 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 lower price level of electricity has reduced uncertainty related to possible electricity price regulation and increased discussion on new support mechanisms that would increase investments in renewable energy in Europe.
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
In the operating environment of bioindustry business, the challenging financial situation has prolonged the implementation of financing arrangements. Schedules have stretched, but market valuation levels have declined. The poor availability and/or high price of certain raw materials and tightened loan conditions of banks continue to create uncertainty. Uncertainty in the market complicates and slows down the emergence of new products and solutions of companies in the scale-up phase of the operating environment, as many customers stick to traditional operating models during uncertain times. However, there are already signs of stabilisation in the operating environment, and the policies of the COP28 climate summit held in Dubai in early December are expected to have a positive impact on it.
In the operating environment of Taaleri’s associated company Fintoil’s biorefinery in Hamina, the prices of raw materials have also started to fall in Europe and, in addition to the main product, the demand for other end products has also started to rise. The tight situation is expected to ease during the first half of the year.
The real estate market continued to be challenging. Transaction volumes remained clearly lower than in previous years, but there was a slight increase in activity in the last quarter. Inflation continued to fall strongly in the last quarter, which increased the pressure on the European Central Bank to lower its key interest rate. However, yield requirements continued to rise. In the rental market, occupancy rates and rental 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.
In the operating environment of Garantia Insurance Company Ltd inflation, rising interest rates and economic uncertainty kept consumer confidence low. As a result, 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. Positive investment market performance affected positively to Garantia’s investment performance as market interest rate started to decrease in the second half of the year and optimism returned to equity market.