The topic of inflation also concerns people who have no investment, after all, their livelihoods will become more and more expensive. Among investors, in addition to high inflation, the issue of real returns is becoming paramount.
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Due to the high level of inflation present globally, we are now reviewing economic processes with inflation in mind as a factor strongly influencing yields.
Inflation is expected to be protracted overseas. This can be attributed to several factors. On the one hand, it is due to the large amount of money that already exists. The more money there is in an economy, the less valuable that currency will be.
Although a lot of countries have used and are living with the option of printing money, so the system is somewhat balanced, the United States has printed an exceptional amount of money in order to restart its economy as soon as possible. You’ve read about this before in the November overview.
If I were to step in not only to shut down the money presses, but also to start withdrawing this plus from the economy, such a large amount of money would not be lost overnight. Moreover, not to ruin with it anything other than inflation.
The other reason is that there are already a lot of vacancies. If businesses want to hire a worker, they will have to offer far higher wages than, for example, before covid.
And this increased cost will be paid by buyers in part from the money they have pumped into the economy.
As a significant portion of U.S. GDP comes from household consumption, the stimulus package meant supporting them in cash, which they could not spend much because of quarantine. That’s why people now have the money to buy products at even higher prices.
In addition to the two factors mentioned above, the protracted higher inflation is supported by the Fed’s medium-term inflation average goal. Since they had a deflation problem so far, it is now true that they have exceeded the target range, but the average is still below the target. That is why they will not step in until the medium-term average justifies it.
The situation is different in Europe, where high inflation is expected to ease much sooner. Don’t be fooled by the earlier term, it can still stay with us for up to a few years, the shorter lead time is due to completely different economic solutions in Europe. This solution is no better or worse than anywhere else, simply because of its historical past.
Contrary to the above, you can observe such events in Europe:
- Inflation in Europe is already lower than in the US, so it causes less problems.
- The labor market is less flexible, and governments in several European countries have supported companies in retaining labor, making labor issues less tense.
- Unlike the US Fed, the European Central Bank did not further increase the amount of cash in the economy by buying government securities as it bought through bank players.
In previous investor overviews, it was said that you could have done well in the stock market so far, and analysts say it will stay with us for a while. The low-yield environment and the simultaneous abundance of money have created ideal conditions for unused capital to find its way.
This does not mean, however, that the road is unobstructed and straight up.
There was mentioned in the October investor overview that there are some risk factors that could be holding back growth. One such risk factor already mentioned was another variant of covid.
As nothing is known about this mutation yet, investors are uncertain as to whether there will be another closure or any other government measure that will have a serious negative impact on the economy.
Investors don’t like one thing, and that is uncertainty. The effect of this on the performance of stock exchanges was also seen. As there is no closure or other action taken yet, this is more the result of panic. Whether and when it settles depends on several factors. From like
- a possible downtime affecting even entire sectors.
- further complicating transport, either through rising energy prices or the end result of a mandatory / optional conflict around vaccines
What can you choose from?
Currently, depending on your own level of risktaking, you can move in several directions in the area of equities. Short-term growth potential is present in growth stocks due to the still low yield environment in many places. However, there is a risk that if there is a change (eg an increase in lending rates), the return outlook for these shares may decline significantly.
In the case of value-based stocks, payed dividends is the most important thing for you, and given that these companies keep their price stable in part with the dividends paid, this is the safest way for you right now.
In addition, of course, it is still expected that the services of companies in the healthcare and communications sectors will be in high demand, so you may have a good return prospect if you choose undervalued securities there.
In the area of bonds, there was also a section in the recently released compass that at the moment is virtually irrelevant to what kind of bond you are thinking of, although it may have a place in your portfolio, but don’t expect a big miracle from them. At the moment, they are typically unable to track the level of inflation, so they represent a negative real return for you.
The picture above shows the yield on 10-year US government securities, with government bonds in other countries having a similar yield outlook. Since the securities of other bond issuers are priced relative to government securities, you can’t expect a serious soar there either.
In your own portfolio, you can currently use bonds the most to maintain liquid parts. The interest paid by the bond gives you a higher return than if you kept your entire reserve in cash. A well-chosen bond is relatively easy to sell, so you can switch if needed. However, do not try to build capital with this tool now.
The price of oil was also mentioned in the November survey. It was still at record heights there and then, and many people were interested in what to expect. I mentioned at the time that the analyzes expected the price of oil per barrel to be around $ 60 by the end of the year, as a further increase would be detrimental to the economy in its own right, so it was in the interests of many to take action against it. The result seemed to come true. This was largely due to an increase in production.
The emergence of the Omikron variant has generated panic and has also reduced the demand for crude oil, so nations that are heavily dependent on crude oil extraction are confident that they will halt further sudden falls, either governmentally or otherwise. This can be achieved either by rescheduling the release of reserves or by modifying extraction.
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