Operating environment, Interim Statement Q3 2024
Economic activity and capital markets remained subdued in Europe in the third quarter of 2024. As inflation has eased, central banks have shifted their tight monetary policy toward a more neutral stance, leading to declining interest rates. In the United States, economic indicators speak in favour of a soft landing, and expectations of interest rate reductions for the rest of the year are more moderate than in Europe. Uncertainty in the stock market increased in the third quarter of the year after a strong start to the year.
The fundraising climate for private capital remained challenging in the third quarter of the year. Uncertainty related to interest rates, the exit market and the geopolitical situation curbed investor demand. However, slight optimism is on the horizon. According to Preqin, the share of investors who expect unlisted market returns to improve over the next year has increased since last spring. Risk appetite increased in infrastructure investments. The decline in interest rates supports the exit market, which in turn accelerates fundraising as investors can allocate capital distributions to new funds.
The renewable energy business is supported by the global transition to renewable energy. The war in Ukraine has accelerated this transition, but at the same time it has created uncertainty in the investment markets and affected investment portfolio asset allocations. The lower price level of electricity has reduced uncertainty related to possible electricity price regulation and increased discussion on new support mechanisms aimed at increasing investments in renewable energy in Europe. Electricity prices vary significantly across different geographical regions in Europe, and the attractiveness of investments in renewable energy projects varies from country to country.
Economic uncertainty and financial market challenges remain present in the operating environment for the bioindustry business. This has led to longer funding rounds and extended project schedules. In the prevailing operating environment, cost efficiency has become an important factor alongside sustainability in short-term decision making for businesses.
The prices of EU emission allowances (ETS) that affect the demand for bioindustry products corresponded to the average for the past year during the review period. The price level of emission allowances remains lower than the forecasts provided by market observers. The price is affected by, for example, the current demand for emission allowances in relation to the abundant supply in the market. The price level of coal in the third quarter was slightly below the year-to-date average and corresponds to the price level before the record-high levels in 2022. The price level of the domestic pulpwood and energy wood used as raw material in bioindustry was at a record high during the third quarter.
The share of investors who expect unlisted market returns to improve over the next year has increased since last spring
The real estate market was characterised by moderate activity in the third quarter, and transaction volumes fell short of the previous quarter. A pick-up in the rental market for residential real estate was indicated by a moderate increase in rents and occupancy rates in the Helsinki Metropolitan Area in the third quarter of the year compared to the corresponding period last year.
The operating environment of Garantia Insurance Company Ltd’s insurance operations was impacted by economic uncertainty that kept consumer confidence significantly below the long-term average and the activity in the housing markets remained low. The continuing low volume of housing transactions significantly affected the company’s sales of residential mortgage guarantees. In Finland, the prolonged weak economic cycle was also reflected in a slight increase in unemployment, but the creditworthiness of the company’s residential mortgage guarantee customers largely remained good, and no significant changes occurred in the risk position of the guaranty insurance portfolio. There has been a slight increase in the housing market transaction volumes, and should the positive development continue, it will have a positive effect on Garantia’s residential mortgage guaranty sales.
As a result of subdued economic activity, companies’ willingness to invest has remained low and the number of bankruptcy filings have continued to rise. The demand for corporate financing has remained modest but in general, the credit worthiness of corporate counterparties in Garantia’s insurance exposure has mostly remained stable. Development in the investment market has been strong during the first nine months of 2024.