Investor Overview August 2021

Investor overview

The effect of covid was observed not only in health care but also in finance. However, this effect has not yet passed and was far from unnoticable. You can replace negative effects with positive ones in the long run, all you need to know is what processes are going on.

The effect of the coronavirus today

I don’t think I need to present the downtime caused by the quarantine period that started in 2020. You have already read economically about what is behind the coronavirus.

As a result, not only has consumption fallen, but also income in many cases, and it sounds good that inflation, too, but it has its downsides.
Inflation has a healthy and necessary level that is still driving the economy. If it is below its current level, a stimulus is needed, and beyond inflation targets, it must be cooled before the economy spins over.

You can see in the picture that in 2020, the recovery of the economy was a challenge in all areas marked in green, as the level of inflation was either around 0% or in some cases below it. In these countries, it was necessary to address the crisis caused by the covid with economic recovery, which could give you an opportunity to reap the benefits of the crisis.

What does the economic recovery look like?

A large amount of people ran out of reserves, a significant part of businesses either did not have creditworthiness or did not have access to credit with suitable conditions, so the inflow of new capital had to be resolved. That is why a lot of central banks (e.g. the Fed) started printing large amounts of money.
As far as covid allowed, the economy started globally. Production has resumed in many places, much of the backlog of investments or just plain retail purchases were realized. There were products that, for some reason (e.g., more expensive labor, more difficult to procure raw materials) were only available at a much higher price than before covid, and for others, increased demand raised the price. This, in turn, brought with it an increase in inflation. At present, its level in Hungary is around 5%. (and it’s the same in several countries)

What is the central bank’s answer to the increasing inflation?

The current level of inflation is now exceeding the inflation targets not only domestically but also globally, so intervention by the central bank is necessary (since the central bank is also responsible for financial stability). The easiest way to cool the economy is to raise the level of the base rate.

If you look at the picture, you can see that the central banks are raising the base rate, so the hungarian central bank has already started to keep the inflation targets. (Not all central banks raised the base rate, there are several other instruments, that can help to cool the inflation)

An even larger raise would be needed to the equilibrium point, but this has its dangers. As the necessary step cannot be taken without causing serious damage elsewhere, inflation remains higher.

Danger of raising the base rate

However, they cannot raise the base rate too much, because then borrowing will also become significantly more expensive.

Many businesses rely heavily on banks for either investment loans or working capital financing. The price (interest rate) of credit products is adjusted to the central bank base rate, a sudden and large increase of which would endanger the existence of many enterprises, which would lead to a stoppage again. Only now not because of the coronavirus, but specifically because of bankrupt companies (who obviously don’t keep their employees either).

How does this affect your investments?

Inflation worsens the purchase value of your money. The higher the level, the fewer products and services you can buy for the same amount of money. To offset this, you can choose an investment whose returns are above the inflation rate, so that not only will your money grow numerically, but it will either grow in real growth, or at least keep its value.

Is government securities adequate to offset increased inflation?

Many people keep their money in government securities. Government securities are suitable for following the current level of inflation. Currently, securities issued to the previous low level are the most traded, and with the current rising inflation level, it is almost fixed that for some time government securities interest rates will not be able to follow the rise. Thus, the yield available on current papers is no longer really able to compete with the inflation rate.

That is, if you kept your money in government securities for a long time, you would lose its purchasing power.

What can you do to keep and increase the value of your money?

The simple answer, obviously, is to choose a form of investment that is suitable for keeping value. You can rightly ask what these are. This is an overview, please if you choose a tool, use it as a starting point at most, as so much information is not enough to make a responsible decision.
If you have a specific question, you can get in touch with me under the contact menu.
Money needs time to work, otherwise there’s a chance you’ll make a loss on it. Either because of starting costs or even exchange rate changes. Accordingly, whichever device you choose, the recommended term will be long-term.

The real estate

Real estate prices have fallen, so you can buy at a depressed price, so your available return can also increase.

Before you dive into buying a property, consider the dangers in addition to the potential. You may have already read about why you shouldn’t buy real estate following the spirit of the crowd.

The real estate fund

For real estate, option B is to choose a real estate fund. If you look at the graph, you can see that although there has been a halt due to the rearrangement to the home office, overall it is not impossible to extract the level of inflation with real estate.

Capital market investment

You can see from the charts showing the global level of inflation that the level of inflation is far from uniform. I see no potential in the red-orange candidates, as there is still a need to cool or keep the farm there.

Developed markets, China

There is a need to stimulate the economy in the areas marked in green, ie developed markets, as well as in China. Where revitalization is needed, you can also achieve more growth.

Why is it likely that you can achieve significant growth?

Well, history repeats itself. After the 2008 crisis, the Fed needed to intervene as the economy was almost at a standstill. In 2015, he started printing money the same way he does now.

S&P 500 performance — Source Performance of the S&P 500

performance of Dow Jones — Source Performance of Dow Jones

Dow Jones and Standard & Poors include papers from the largest U.S. companies, giving a good picture of the performance of the economy as a whole. If you look at the performance of these indices before and after 2015, you can see that they went through dynamic growth right after the money flowed into the economy.

Since the same situation has occurred today, the same effect is likely.

Questions:

How do you reconcile your own investments with the change generated by the coronavirus?
How many years do you think the upswing could last as a result of the economic recovery?
What are you doing to keep inflation’s affect to your investment to a minimum?

What do you think about the topic? Feel free to comment or contact us here.