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market insight finland 2013 q4

Upbeat Finns look past domestic woes


Our analysis, which is based on face-to-face and telephone interviews – conducted in September, with fund selectors at Helsinki-based insurance companies and pension funds – also reveals an upbeat macroeconomic view among the city’s professional investors, despite the sluggish domestic growth picture.

Macroeconomic outlook

Positive consensus despite local headwinds

Finland suffered more than its Nordic peers during the recent financial crisis, as the global economic slowdown hit the nation’s exports – a sector worth more than a third of GDP.

Interviewees said the country had additionally been hurt by overreliance on “old-fashioned” industries which face long-term decline, such as paper production – a problem recently highlighted by speculation that Finnish writing-paper giants UPM and Stora Enso will be driven to merge their European units.

Even Finland’s high-tech champion – Nokia – has fallen out of favour, they noted, prompting the sale of its handset business to Microsoft.

On top of this, investors said that Finland faced the challenge of a rapidly ageing population, owing to its low birth rate and tough immigration rules.

Older voters were also resistant to necessary but painful structural changes, they added.

Yet on the broad 12-month macroeconomic outlook, almost two-thirds of fund selectors expressed a positive view – a significant improvement from the Expert Investor Finland event in November 2012 (see chart 1).

Emerging market stocks

Valuations perceived as attractive

Finnish investor appetite for emerging market equities has fallen slightly since last year but remains strong, with just over half of our interviewees planning higher allocations in the next 12 months (see chart 2).

While fund selectors said they were unlikely to make dramatic changes to their EM weightings, they noted the asset class was attractively valued, following the sell-off in 2013.

“Global emerging markets have been in the shadows and there might be a turn coming,” said one.

Another drew a distinction between large and small emerging economies.

While he was heavily underweight the so-called BRICs, owing to concerns over the long-term impact of upcoming US tapering, he was upbeat on “frontier” nations (excluding Indonesia, which he said had been “over-hyped”).

Developed world equities

Investors favour Europe over US and Japan

Interviewees were also upbeat on western stocks, and expressed a clear preference for European over US equities – in line with last year’s Helsinki event (see charts 3 and 4).

Fund selectors noted that the eurozone debt crisis remains unresolved, but said they expected further positive newsflow from the region.

Some pointed to improvements in the banking and automotive sectors.

In contrast, while some interviewees were attracted to US equities by the country’s rebound, and the prospect of growing dollar strength against the euro, many viewed the asset class as over-valued.

There was little appetite for Japanese equities, although the proportion of fund selectors planning higher weightings rose in net terms, from zero to 14%.

One discretionary manager summed up the ambivalence of Finnish investors towards the asset class. “We are underweight and if Abenomics works we will go towards neutral,” he said. “However, we are not convinced yet.”

Fixed income

Strong appetite for riskier bonds

Compared with EM and European stocks, appetite for higher-rated government and corporate bonds was muted, with only small proportions of our interviewees expecting to increase their developed market sovereign and investment grade allocations (see charts 5 and 6).

“The steak has been eaten” said one fund selector, when asked about western investment grade.

Riskier high yield and emerging market government bond strategies are more likely to see substantial inflows in Finland – although demand for the latter has declined since 2012 (see charts 7 and 8).

Investors were similarly upbeat on EM credit, with a third planning higher weightings.

Alternative investments

Fund selectors hungry for diversifiers

There were similar levels of appetite for Ucits absolute return strategies (see chart 9), with many interviewees viewing them as an attractive diversifier for equity and bond exposure.

One investor referred to such products as the “least bad option” in the current market environment.

Yet about a quarter of Finnish fund selectors did not have an absolute return allocation, and many in this segment were sceptical. One dismissed the funds as “expensive gimmicks”.

Looking at alternatives more broadly, there was some appetite for other asset classes offering low correlations, including private equity, venture capital and property.

Patrik Engstrom and Will Jackson, members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data.

For more information, contact Patrik at or on +44 (0)20 7065 7582.

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