EU equities are still the most popular asset class, with a majority of Finnish fund buyers increasing their allocation. Emerging market stocks, and in particular Asian equities, are also gaining ground. On the macroeconomic front, Finnish investors are less optimistic than their European peers. In general, they think the global economic rebound in growth is partly artificial, and to a great extent driven by central bank policies.
Emerging market debt
EMD-slump creates opportunities
Half of the interviewees will increase their investments in emerging market corporate debt during the next twelve months, while none of them are planning a further retreat. EM government bonds enjoy almost equal popularity as EM credit, with 44% of fund selectors increasing their allocation. This is by far the highest percentage in Europe, so the Finns could be leading the way back into the asset class after last year’s sell-off triggered by QE-tightening and havoc in Ukraine, Thailand, Turkey and Venezuela. Some fund buyers said they see the low prices and competitive exchange rates that resulted from this turmoil as a buying opportunity, noting that they currently have low exposure to the asset class.
Emerging market equities
Eyes on Russia and frontier markets
The same compelling story might hold for equity investments in the region. 41% of interviewed fund selectors will increase their allocation to emerging market stocks, while none plan to decrease their weighting. Moreover, more than half of the interviewees will increase their allocation to Asia ex-Japan equities. Several fund selectors said they expect companies in the emerging markets to profit disproportionally from a pick-up in global growth. Almost 60% of interviewees have adopted a wait-and-see approach for now, with some noting that they are ready to start investing again as soon as markets turn.
Compared to other European countries, frontier market equities also enjoy a relatively high popularity in Finland, with 39 percent of fund buyers increasing their allocation in the coming year. Noting the limited liquidity of frontier markets still limits investment options there, some fund selectors voiced their excitement about new product launches focused on frontier markets.
Mixed feelings on US
Finnish fund selector sentiment towards EU equities mirrors that of their European peers. 59% of interviewees will step up their allocation, while none of the interviewees voiced explicit concern about valuations yet. Fund buyers are much less decided on US equities, with 53% keeping their allocation unchanged. 29% will increase their weighting in the asset class. There is a consensus that US valuations are demanding. Nevertheless, three fund selectors made a strong case for investing in US stocks, citing the benign demographic situation compared to Europe, its energy boom and the recovering construction sector accelerating growth. Moreover, one respondent remarked interest rate hikes as we are probably going to see in the US in the near future have historically been a positive indicator for stock markets. Japanese equities are not a hot debated topic among Finnish fund selectors at the moment, with more than a third decreasing their allocation and 59% keeping it unchanged. Almost a quarter doesn’t even use the asset class.
A popular diversifier
Similarly to some other European countries, absolute return is ‘a theme in Finland’, as one fund selector put it. The asset class is seen as the most obvious way to diversify away from low-yielding traditional fixed income investments such as developed market government and corporate bonds. 53% of interviewees will increase their allocation during the next twelve months, up from 33% in January. Some Finnish fund selectors said they don’t really see alternative options to absolute return in reducing interest rate sensitivity while retaining bond exposure. While sentiment on d
eveloped market government and corporate bonds is outspokenly bearish, a quarter of interviewees still is stepping up their allocation in high yield, citing the higher interest, the low correlation with other bond categories and demand from clients as reasons for that.
Solvency II and Mifid implementation coming up
On the regulatory front, Finnish fund selectors seem to anticipate on the consequences of two European directives. The upcoming Solvency II is seen as a manageable challenge, though some fund selectors of pension insurance companies say its stricter reporting requirements will restrict their investment opportunities and increase administrative workload. A number of fund buyers also mentioned the implications of Mifid II implementation in Finland, with one interviewee wondering how a possible abolishment of distribution fees (as happened in the UK and The Netherlands) would implicate their business. A number of fund selectors also noted the increasing price competition, especially on the institutional market.