The bumpy phase continues, which could be the entry point for a long-term investment.
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Since the beginning of the year, the equity sector has experienced strong volatility, which is an almost direct consequence of the economic recovery during the covid. Make no mistake, the recovery was necessary. Indeed, the memory of the 2008 crisis is still vivid in the minds of governments.
Why is it not a good idea to let things run their course and risk another 2008 crisis?
Then and there, it was a crisis that started on the credit side and was severely prolonged by a lack of confidence. Many companies did not get new credit to grow, their credit lines were not renewed, so in order to avoid going bankrupt if possible, they downsized. A lot of people lost their livelihoods and banks had to cancel many loans. Although all banks were cooperative with the customer, they had to cancel the loans, because it was not that the debtor did not want to pay, but that he could not. And it is also difficult to pay credit out of nothing, and difficult to buy any product. It was possible to take action for a while, but the problem spread to previously untouched areas.
This is the deflationary cycle that all governments have sought to stifle at its roots.
What was the solution now?
Almost simultaneously with the emergence of the covid quarantine, large amounts of cheaply available money started to be pushed into the economy. This amount was impossible to spend at once, if only because of the quarantine. Although jobs were generally preserved, money sought and found its way elsewhere. And we have seen this in the significant rise in exchange rates in almost all areas.
The downside of the solution
The downside of money abundance is that it brings with it inflation, so that to contain it we need to reduce the amount of money available. One way of doing this is to raise the base rate, which would have been expected from either the Fed or the ECB as early as 2021.
The current situation is very complex and inflation needs to be contained without pushing the economy into recession. Many financial experts have different views on the right solution precisely because of the complexity of the situation.
As the base rate rises, interest rates on loans are creeping upwards, and the uncertainty shown by central banks and governments about the solution is creating uncertainty among businesses. And rising funding and uncertainty is encouraging them to delay investment, with a knock-on effect on share prices.
Equities are set for a bumpier ride this year for the reasons already mentioned. However, that doesn’t mean that if you’re looking to plan for the longer term, now is not a good time to get in. The reason is that
- governments need to find a direction they believe will stabilise the economy by the end of 2022 and the beginning of 2023
- firms cannot wait indefinitely to develop, either they can price in higher costs or take a risk or the market will pass them by.
Which stocks have risen?
Their share price collapsed at the beginning of the year, but this did not cause them to disappear, there was just a sharp rebound. Whether this can be considered a correction is a matter of opinion, after all the Nasdaq’s relapse at the beginning of the year is strong enough to be more than a correction. But from the bottom it is very easy to go up a lot.
Energy, raw materials and related (e.g. fertilizer)
Energy prices are rising, which is less good news. The question with this is whether the economy will be able to absorb this level of price increases, because if not, history will repeat itself and another crisis will come from the direction of energy prices.
High energy prices, on the other hand, have had a positive impact on the revenues of the companies involved and, with them, on their share prices.
The winners here are not only those companies that deal with gas specifically because of its role as an energy carrier, but also those that process it. This is why fertiliser producers have also done well.
Companies that are market leaders
They have a pricing advantage and are therefore able and willing to pass on increased costs to consumers. This makes it less of a problem for them to have to raise prices because of rising costs.
These companies are among the value-based stocks, including the large ones that have a well-established brand name and a sufficiently wide consumer base.
What can we expect for equities this year?
The bumpy phase remains, which is a long-term entry point after proper selection. Governments and central banks are expected to take a stance on what fiscal policy they want to pursue towards the end of the year, and from there we expect companies or even whole sectors that successfully adapt to this to start to move upwards.
The dollar strengthened on the back of the Fed’s interest rate hike. Up to now, we could be happy about this, or say that the dollar is the US’s own currency, in fact it is its own business, just as the interest rates on the forint are not much of a matter for anyone. But the dollar is the world currency and many investors invest in dollars.
Many countries are indebted in dollars.
Interest rate increases and the rise in the dollar exchange rate also have an impact on repayments. This in turn affects other countries. In short, by raising interest rates to fight inflation, the Fed is indirectly interfering with the functioning of other countries.
Bond yields are rising.
Although the bond market is still not attractive enough for investors in the current inflationary environment (given that real yields are negative), the rise in bond yields has an impact on the expected return on other investments and hence on the demand for them.
The Fed’s rate hike will not only change the yield on bonds, but also the yield on real estate. This is partly due to rising price rises as well as rising lending rates.
Last year, the Chinese stock index did not show much of a rise either, but rather moved sideways. This was due to China’s internal reorganisation, in addition to its covid quarantine. The Chinese state has reorganised, among other things, its own
- its property market
- its data management policy
In addition, it is focusing on catching up with the more backward rural areas in order to reduce inequalities, and also to reduce inequalities by expecting more social responsibility from the large companies it has been supporting. This only paves the way for growth, but is not ideal for the growth we are seeing now.
And this year is even more downhill.
The reasons for this are already elsewhere:
- The Fed’s cycle of interest rate hikes and the associated rise in US yields are having an impact on expected yields in other countries.
- The Shanghai region has been closed due to the epidemic, causing significant damage to the economy
- Sino-US relations have been strained for some time, with many investors pricing in the possibility of Chinese companies pulling out of US stock markets
At present, the issue of inflation in this country involves several components. In Hungary, imported inflation is the main determinant of inflation. For this reason, it is important that the forint exchange rate, whether against the dollar or the euro, should fall, but the opposite seems to be the case. You can see the downside of this when
- you enter the market of another country as an investor
- buy anything at home (the price increase of imported goods is passed on everywhere)
- go abroad on holiday
To curb inflation, the central bank raised interest rates again on 1 June. This took it to 5.90%. This is quite high compared to the previous almost 0%, but in a longer historical context it is still a moderate level.
The high base rate also pushes up lending rates, which in turn has an impact on the housing market.
The price increases already mentioned for US real estate are also being experienced here. Here too, this is the result of a combination of rising labour costs and rising prices for building materials, which in itself is reducing demand. A moderation in real estate prices is expected. In the section on market cycles, we also discussed real estate, in the context that it behaves in a similar way to equities, with some phase lag. You can observe this now.
As the money flowed out of equities, and the interest rates on loans from banks were not yet (so) high, and you could still get all the existing subsidies you were entitled to, so house purchases got a bit of a run-out.
With the current rise in lending rates, repayment rates are also rising, which means that the bank can approve fewer loans for the same income. This in turn leads to either a much higher equity requirement for a property that is already offered at a higher price. The other option is to either reduce the purchase price or look for another solution.
The price of building materials has also seen a dynamic increase recently (and is not expected to stop rising), which also encourages prospective buyers to make a more considered move that they can finance.
The supply side is also expected to put pressure on property prices. Construction work already underway will either be completed and sold, or the money invested will be lost.
For many, the previously taken out e.g. baby loan has run blind, in many cases the quarantine has not worked and the couple prefers to continue separately. Since they no longer have the money, they can pay back the money from the sale of the property.
Impact of central bank and government actions
This has an impact from both directions at the same time, after all it can affect the interest on existing loans. For example, because the moratorium will end on 30 June, or simply because the interest period will end there and the bank will recalculate according to the contract. In most cases, this will lead to an increase in repayments. If the debtor cannot pay this, he will be forced to sell the property.
With the end of subsidies and soft loans, buyers can get the property at a higher price, with more equity and higher repayments. That is if both the buyer and the bank say yes.