Finnish stocks have yielded world-class returns

Good day folks. In this post, we talk about how wealth is growing in Finnish stocks. Then we’ll talk about a new indicator in the Eurozone that helps to chart the direction of inflation. After that we’ll look at the latest economic data, which makes the wait long for those expecting a recession. Finally, there’s a reminder of how difficult it is to predict the short-term movements of the stock market.

Wealth is growing in Finnish equities

In the aftermath of Independence Day (6.12.), it’s an excellent moment to briefly remind you that the Helsinki Stock Exchange is one of the best in the world in terms of long-term returns. Wealth is also growing in Finnish stocks too.

I have been updating this graph of total returns on the Helsinki Stock Exchange since Finland’s independence. From 1917 to the present day, the Helsinki Stock Exchange has yielded with dividends reinvested and adjusted for inflation around 6.6% per year. This despite a couple of world wars, civil wars, energy crises and a flatlining economy over the last decade or more. As I understand it, most of the returns on the stock market are explained by the dividends that Finnish companies pay to their owners year after year for lack of anything better to do with the capital.

 
This year, the Helsinki Stock Exchange has fallen by about 9% with dividends considered, but if you take into account an estimated 7% inflation for the year as a whole, the collective purchasing power of Finnish share savers has fallen by as much as 16%. Note that people usually invest in shares because saving in them can increase their purchasing power in the future. We save in shares today so that we can spend more in the future. Therefore, it makes sense to account for inflation in returns.

This graph shows the total annual return over the last 30 years or so. As you may notice, the Helsinki Stock Exchange doesn’t return around 7% per year in general, but the returns have varied from 160% in the IT bubble in 1999 to a -49% dip in 2008. The ride on the Helsinki Stock Exchange can be quite profitable in the long run, although you need a lot of investor’s grit along the way.



New gauge for Eurozone wage inflation

Let's talk a bit about wage inflation in the Eurozone. Perhaps the biggest danger of the current inflation spiral is that it will become permanent. To stay on top of this spiral, wages will have to keep rising again. Otherwise, prices would get out of reach for everyone, which would be a somewhat absurd situation. For equities, bouncing inflation would be perhaps the worst-case scenario, as companies' profits melt down while rising interest rates destroy their value.

As bottlenecks are resolved and supply chains are restored, it’s safe to say that inflation will cool down from what fueled it at the beginning of the pandemic. Energy prices can remain high, but inflation by definition requires constant price increases, so energy alone isn’t enough to drive inflation. However, labor shortages and wage inflation can push inflation to a sustained higher trajectory, as people can then also afford to pay a little more for everything that is in short supply.

In the US, it is easy to monitor wage inflation because the data comes in monthly. For example, the estimated wage developments for October were already published on December 2. This allows economic operators such as the central bank to make informed decisions based on fresh data.

In Europe, on the other hand, where meetings are spent drinking coffee and siestas are lengthy, things are done at a slower pace. The latest wage data is for the second quarter, which ended in June. This data was released on September 15, i.e., 2.5 months later. In the spring quarter, wages rose at an annual rate of 4% in the Eurozone.

Thus, the European Central Bank must make bold assumptions based on really old data about wage developments. And these wage developments are, of course, an essential part of the forces that feed inflation. Not only do the publications come months late, but they also include a lot of negotiated wage increases in unionized Europe. This isn’t necessarily the best reflection of where wages are going, but more of a rear-view mirror view of where wages were going at the bargaining table months ago. Moreover, not all such wage data is even available in Europe.

Fortunately, the wise Central Bank of Ireland and data platform Indeed have teamed up on a project to build a fast-updating wage tracking tool similar to the Atlanta Fed's wage-tracker in the US. This gauge is certainly needed. It’s based on online job advertisements in six Eurozone countries such as Germany and France. The advantage of monitoring these advertisements is that the data can be compiled quickly. In addition, new job advertisements are a good indicator of the direction of the labor market. If there is a shortage of labor, wages in advertisements will rise rapidly. If not, they can fall quickly, unlike traditional wage data.

 
Wage inflation has accelerated throughout the fall, according to this measure. Wages are now estimated to rise at an annual rate of 5%. In Germany they rise to over 7%, in Italy and Spain to 4% and 3% respectively. The wage rally in the Eurozone is widespread, with more than 60% of jobs estimated to be growing at an annual rate of more than 3%.



If anything good can be seen from this data, it’s that Germany's long depressed wages are rocketing, boosting the purchasing power of Europe's largest economy and helping in some small way to address the root causes of the euro crisis - Germany's excessive current account surplus. Second, in some places the rise in wages already seems to be reversing. After all, it's the direction that matters to investors, not the present.

The message of this new indicator is less flattering for the ECB. As everyone knows, raising interest rates in the Eurozone isn’t an easy Sunday stroll in the park for the whole family, like in the US. Rather it’s a haunting horror movie that’s not for everyone, like the over-indebted Italy of the family. If wage inflation shows no signs of abating, there is no point in hoping that interest rate hikes will stop for a while in the old continent. It would also be felt in the wallet of a Finnish mortgage debtor.

I for one look forward to following the story of this gauge and will try to bring it up in future posts as more data becomes available.

The economy is doing just fine

I have brought up a lot of financial data in each of these posts, but there is a logical reason for that. Perhaps the biggest risk to equities at the moment is a recession, which would destroy earnings and bring economic turmoil.

Yet this is an expected recession, as usually a recession surprises investors. This graph shows the average assigned probability of a recession in a year's time by economist forecasters tracked by the Philadelphia Fed. In practice, economists have never before considered a recession likely than when one has already been underway. And at this stage, stock prices have already started to rise again in anticipation of a better tomorrow. At the moment, expectations of a recession are quite confidently high by historical standards, but it’s worth remembering the chronic weakness of macro forecasters' ability to see the future.

 
So far, the recession isn’t reflected in economic data for the US. Employment data is strong, with only 200,000 claims for unemployment benefits a week. Usually, in a stereotypical recession, the number of applications exceeds 400,000. Thus, one is unlikely to occur right away.

The Purchasing Managers' Index for services, which account for the bulk of economic activity, struck another strong reading, signaling continued strong growth relative to the previous month.



In Europe, German industrial output also performed better than expected. Industrial production fell 0.1% in October, while expectations were at 0.6%.

China, on the other hand, is quietly running away from a strict COVID policy as the people have been on the barricades. According to Bloomberg, Communist Party officials are planning a 5% GDP growth target for next year, indicating a desire for growth rather than sitting at home.



Strong economic data is a double-edged sword in the sense that, it gives less reason to expect inflation to subside quickly as the economy rages on with limited hand savings and other resources. Of course, still less accurate measures, such as yield curves, predict a recession in the next couple of years.

After all, many investors are perhaps too eagerly awaiting a return to a time when the central bank would cut the funds rate again and those stale-smelling growth stocks would take off like a hot dog hijacked by a seagull in a market square. It's worth pointing out that often the first interest rate cuts have foreshadowed problems in the economy, rather than being the starting point for a quick run to the north-east in equities. This graph shows the Fed funds rate, highlighting the interest rate cut points and the S&P 500 index on a logarithmic scale. So be careful what you wish for.

To conclude, the career of a long-term investor is inevitably subject to downturns, crises, bull markets and crashes. Timing these is practically impossible. Even if you know next year's earnings development, success in the stock market isn’t guaranteed. In the short term, shares don’t even follow earnings closely. This graph shows the correlation between the S&P500 and the change in one-year results. It’s virtually non-existent. The reason is, of course, that the stock market looks much further ahead than one year. Furthermore, the stock market is affected by several other things such as interest rates, sentiment, and liquidity.



The key is to buy quality companies well below their fair value in weak times and ensure that you don't buy companies in a boom that go bust in a weak cycle.

The longer the investment horizon, the less you need to worry about short-term cycles and the easier it is to focus on long-term economic drivers.

All the more reason to take the time to assess the long-term competitiveness of companies. After all, that's what matters in the long run.

Thank you for reading the post! Read analysis and make good stock picks!