LD Pensions has two funds, each with its own return. The return on LD Discretionary, which is the largest investment fund at The Cost-of-Living Allowance Fund, stood at 3.1% on 26 May 2023. Over a 36-month period, the portfolio has delivered a positive return of 13.0 per cent. The return on the Employees' Holiday Allowance Fund at the start of May 2023 was also positive at 3.5 per cent. In other words, both funds have delivered much-needed positive returns.
Markets have been positive so far
Both equities and bonds have delivered positive returns in 2023, from which LD Pensions’ portfolios have benefited. Global equities, as measured by the MSCI World Index, have delivered a year-to-date return of 7.5 per cent in Danish kroner. Danish equities, represented by the leading OMXC25 index, have returned 7.6%. Corporate earnings in the first quarter of 2023 have thus been better than expected, and a number of major technology companies have delivered better-than-expected results during the recently concluded earnings season.
Furthermore, the stock markets are factoring in the fact that the central banks in the US and Europe will soon stop raising interest rates, which have otherwise been rising at a historic pace since the first quarter of 2022. Inflationary pressures are also easing, although core inflation (i.e. excluding energy and food) remains relatively high at 4.5% in the US and 5.7% in the eurozone. Energy and oil prices have fallen to a much more normal level compared with 2022. The yield on a 10-year US government bond is now 3.8%, which is significantly lower than in October 2022, when the yield peaked at 4.25%.
Slowing growth
Despite positive returns, there have been market reactions that indicate growing nervousness. One example of this was the fall in bank shares in March. The two banks, Silicon Valley Bank and Signature Bank, ran into difficulties and collapsed. In addition, Credit Suisse ran into serious trouble and was taken over. Suddenly, the stock markets were talking about a potential banking crisis, which had a significant impact on the stock market in general.
The economies of Europe and the US in particular have experienced strong growth between 2020 and 2022. Low interest rates and accommodative fiscal policy in 2020 and 2021 have contributed to the economic boom. There are now a number of leading indicators suggesting that growth is beginning to slow. Higher inflation and rising interest rates over the last 12 months are starting to have an impact on economic activity. The impact of interest rate rises on the real economy is felt with a lag, so activity and growth are expected to be further affected in a downward direction.
The US debt ceiling looms
The US is soon set to reach the upper limit on how much money the US government is allowed to borrow in order to pay its bills. The debt ceiling is a point of contention between Republicans and Democrats and a recurring issue in US politics. If the two parties do not reach an agreement by 1 June, the US public sector could default on its payments, which would have a negative impact on both the economy and the stock markets until a solution is found.
As a result, fears of a recession are growing amongst investors. In the coming months, there will therefore be a strong focus on central banks’ interest rate policies, growth forecasts and inflationary pressures, whilst the impact on corporate earnings will also be closely watched by the markets.
