Norwegian Storebrand’s chief economist: The market is already pricing in too many interest rate cuts

Could you to allow the use of debt leverage for Finnish occupational pension investors? Such a question has now come up in the pension negotiations of labor market organizations.

Chief economist of the Norwegian wealth management company Storebrand Olav Chenin from time to time, the issue has also been discussed in Sweden and Norway. Storebrand is one of the largest private wealth managers in the Nordic countries.

Chen agrees with the finance professor about the use of debt leverage Vesa Puttonen.

Puttonen stated HS:lle on Sunday, that instead of using debt leverage, it would be more reasonable to increase the proportion of shares in the investment portfolios of occupational pension companies.

“I would also recommend increasing the proportion of shares,” says Chen.

In both ways – by using debt leverage or by increasing the number of equity investments – it would be possible to obtain higher returns for pension investments than is currently the case. In this way, above all, the pressure to increase occupational pension contributions could be dammed.

However, the chief economist of Norway’s largest asset manager has not come to Finland to advise how pension funds should be invested. He has been in Helsinki speaking to Finnish institutional investors.

For HS, Olav Chen is prepared to talk about the big picture of the economy. And that’s what the income of pension funds ultimately depends on.

Always it could go better, but it could also go worse. This should be kept in mind now that the central banks have started to cut their key interest rates.

Although tight monetary policy has strangled the economy for the past two years, Western countries still seem to have survived the rise in interest rates relatively unscathed. In the United States, the economy is still doing quite well, and the Eurozone has so far not been hit by any of the worst possible recessions.

In addition, both the US central bank Fed and the European central bank ECB seem to have achieved their price stability goals after two years of efforts. According to it, inflation should be two percent on average over a long period of time.

In Chen’s opinion, fears about a slowdown in the economic growth of Western countries should be alleviated a little.

“In my opinion, the threat of recession is by no means immediate. Most indicators still point to a soft landing, i.e. the economy is not drifting into recession as a result of high interest rates.”

Economic growth instead of slowing down, one should be concerned that the market has now begun to price interest rate cuts unnecessarily enthusiastically, says Chen.

“The pricing would be justified if the increase in the unemployment rate in the United States were more rapid than it is now. At the moment, however, a soft decline from the time of high interest rates seems likely to such an extent that there is no justification for pricing.”

Investors really seem to have recently reacted sensitively even to small movements. Partly for this reason, the US Federal Reserve had to think very carefully about the size of its rate cut on Wednesday.

The Fed finally decided cut its policy rate by 0.50 percentage points. The Financial Timesin (FT) by however, on the eve of the interest rate decision, the central bank was afraid that investors would misinterpret the half-percentage-point interest rate cut.

The Fed did not want to give the market the impression that the US economy needed a sharp interest rate cut to pick up the pace. The central bank’s concern was that the market, fearing a recession, would start pricing interest rates too low.

Fedin as a relief, the 0.50 percentage point interest rate cut mostly seems to have calmed the market.

Investors now seem to believe that a larger-than-usual key rate cut prevent recession. This was immediately visible on Thursday in the rise of share prices in various parts of the world.

And what about Europe? The European Central Bank has so far been ahead of the US central bank in interest rate cuts. It began easing its monetary policy already in the summer.

Last week the ECB announced from the second rate cut this year. It lowered its key policy rate, i.e. the commercial banks’ deposit rate, from 3.75 percent to 3.50 percent.

At the same time the President of the ECB Christine Lagarde said the central bank is ready to consider the next cut in key interest rates in October if there are clear signs of deterioration in the economic outlook.

Chen acknowledges that the recession risk is greater in the euro area than in the United States.

Europe’s largest economies, Germany and France, each have problems. Germany has already suffered from weak economic growth for a long time. France, on the other hand, is struggling with its inflated debt ratio. Before long, it may have to adjust its public finances to reduce debt.

However, Chen does not consider the economic problems of Germany and France to be such that the ECB should start to influence the overall demand of the Eurozone by easing monetary policy faster than at present.

“The euro zone would have to go into a severe recession in order to justify lowering interest rates faster than at present,” he says.

“By a severe recession, I mean a situation where an increase in unemployment would be followed by a decrease in consumption, which would increase unemployment even more and reduce consumption even more. In my view, there are no signs of such a vicious circle developing in the euro area.”

European According to Chen, the most pressing question for countries at the moment is what kind of world they will find themselves in after the US presidential election.

“In Europe, it has not been analyzed and understood sufficiently Donald Trump’s profit related risk. It is very possible that if Trump wins, he will extend the trade war from China to Europe.”

Horrible Harris according to Chen, there is no such risk associated with profit. However, he in Europe should not be taken any more lightly if Harris wins the election.

“Regardless of which of the candidates becomes president of the United States, Europe must begin to think seriously about what kind of market and with whom it will trade in the future.”

Even Harris’ victory could force Europe to choose whether or not to side with the United States against China, Chen says.

“I could imagine that the United States is now waiting for a decision from Europe on the matter based solely on the role the United States has taken in the war in Ukraine.”