Evaluating the first three months of 2023 and seeing the green – growth – color in the graphs, of course positive emotions take over, but in general I would like to call the first quarter not a time of growth, but rather a natural “normalization” time. It must be said that the first quarter was not a smooth ride up. In these three months, we observed both ups and downs in the financial markets, and more than once.
Europe is getting stronger
First about what happened “closer to home”. Last year, when Russia began its invasion of Ukraine, the dependence of European countries on Russian gas became a particularly pressing issue. This question worried almost everyone – security experts, policy makers, business people and anyone whose home is heated by gas. Concerns were also felt among investors, but Europe managed to overcome the challenges of the energy resources market and quite successfully adapt to the new situation, thus becoming more and more attractive in the eyes of investors.
Even last year, for many investors, Europe was a region that did not seem so attractive, rather a secondary investment market to which a smaller amount of assets could be directed. Now this is starting to change, and the US is now relatively more negative.
Inflation and the collapse of US regional banks
In mid-March, stock and bond prices around the world were rocked by the collapse of US regional banks Silicon Valley Bank, Signature Bank and Switzerland’s Credit Suisse. In general, at the moment, it looks like the issue of these banks is being controlled successfully – the initial panic of the customers of the specific banks has not spread and has not become a problem for the entire system.
Or will “normalization” continue in the second quarter, or is growth expected? It depends on various macroeconomic indicators, the main of which is inflation. Since last year, European and US central banks have been trying to curb inflation by raising interest rates. At the beginning of the year, inflation indicators were still far from encouraging, but the latest data show that inflation is easing, albeit a little slower than expected in the US.
Currently, we see in the financial sector that some market participants are inclined to believe that as the economy slows down, central bank policy will become more lenient, while others still doubt whether we will see any changes in central bank policy so soon.
Fast movements – the “new normal”
Until the spring of 2020, when the Covid-19 pandemic began to rage in the world, the financial markets lived quite peacefully for many years, observing the classic cycle – after rises, falls follow and vice versa. Of course, the cyclical nature of financial markets has not been abolished and the markets are always going up, then down and up again, but in the last three years these movements have not only been sudden, but also very dramatic – a rapid decline is followed by an equally rapid growth, experiencing as much as a decade within a year the worst result as well as a full recovery from such a fall.
I think that calm cyclical time will not be our everyday life at least for a while. Instead, you should be prepared for rapid changes, but this is not necessarily a bad thing. In recent years, the stock markets have always reacted relatively quickly to good news, this year we have already seen that even the probability of no further interest rate hikes can sow optimism.
Looking into the near future, in parallel with macroeconomic indicators, the financial market may be moved very soon by the announcements of large companies about the results for the first quarter of this financial year.
Meanwhile in Latvia
So, as usual, there are a lot of variables, but what does this mean for the members of the 2nd level of Latvian pensions? Of course, the events in the financial markets in the world have an impact on the investment plans in Latvia as well, therefore the first quarter of this year has ended positively in the investment plans as well as in the financial markets. Conservative plans have also begun to recover, which experienced a significant decrease in value last year due to the rapid rise in bond rates.
If we look at the long-term graphs of pension level 2 investment plans, we see that the plans show a positive result. Long-term performance is the most objective of the indicators for evaluating the results of plans, as we usually save for retirement for several decades. The emotions with which financial market experts and analysts were waiting for 2023 are still relevant – some are more optimistic, others are a bit worried, but at least at the moment we are still in the “normalization” period.
