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Investor Overview March 2022

Investor overview

Markets are getting really nervous about the high levels of inflation globally. The last time it was this high was 42 years ago. No economist has professionally experienced such high inflation themself. (They may have lived it, but they were children)

Investor Overview February 2022



This article is for information purposes only and is not intended to provide investment advice. It is not a solicitation to buy or sell any financial instrument. If you would like help with this, please contact us to speak to a licensed member of our team.

Financial overview

Economists were already expecting bumpy times ahead for 2022 at the beginning of the year (i.e. before the Russian-Ukrainian conflict). This does not mean an economic downturn or even a crisis, just a period of uncertainty.

There is no sign, either at the beginning of the year or since, that another crisis is imminent. Of course, there may still be something that is not foreseeable, just as no one could have foreseen the covid, and no one can foresee how the situation in Russia and Ukraine will develop.

What is the reason for the uncertainty?

A still high inflationary environment

In a high inflation environment, bonds do not perform well at all, and you need to choose between equities and equity-based investments with due diligence to succeed.

FED rate hikes

Although a Fed rate hike was expected, the magnitude of the hike is uncertain. Before you settle for them to resolve it in-house at that time, given that it is their inflation problem, please note that it will also affect the dollar exchange rate, and many emerging market players are indebted in dollars. In other words, the Fed is indirectly but indirectly affecting the economies of other countries, which could have a knock-on effect on their own.

Russian – Ukrainian conflict

Although it is not known in which direction the current situation will develop further or how long it will last, let’s take a look at what has happened so far in the economy and what can be expected based on what we have seen so far.

From an economic perspective, this war is fortunately a localised event. So if you are looking at the impact on markets, you have to look at geographical proximity. A Japanese trader will be less affected than a Hungarian.
The good news is that geopolitical events in themselves rarely cause recessions, order is restored relatively quickly, provided the economy is not in a bad state to begin with.

Russia’s situation

The GDP shows the performance of different economies, it is measured in US dollars. Of course, you could say that Russia is big enough to have a sufficiently large internal consumption of its own in ruble terms. But if you think about it, what matters to you now is how it has performed compared to other countries.

This is how Russian GDP has evolved over the last 20 years:

Russia's GDP 2000-2020

The drop in 2014 reflects the annexation of Crimea, after which there was an increase until the emergence of the covid. Not bad so far, but just to give you a basis for comparison, let’s add another country as an example, say Italy, which is far smaller than Russia:

GDP of Russia and Italy 2000-2020

Yes, you see, the Italian economy is doing better than the Russian economy, which is why it is vital for Russia that the war ends as soon as possible.

Russia is currently involved in global trade, typically in raw materials, of which it gives a significant part of the total supply. It is no coincidence that the price of crude oil has skyrocketed with the cut-off of Russian gas.
Crude oil exchange rate
Changes in the price of oil also depend on the outcome of the war. If the EU fully accepts that it will not buy any Russian oil and gas at all, then it will obviously have to be replaced from elsewhere, and the price of oil, and therefore fuel, will remain permanently high. However, with the war winding down quickly, there is the prospect of a significant reduction.

Impact of sanctions on the Russian economy

Among the best-known sanctions is the disconnection of several Russian banks from the SWIFT system, which makes it virtually impossible to move money in and out of Russia, making it difficult to pay for raw materials and have several difficulties in the area of finance.

The picture shows the Russian stock index in rubles (denominated in rubles):

MOEX index


You can see that this has hit the Russian economy very badly, so it’s legitimate to ask how much we should fear that they will turn to China and what the European Union doesn’t buy, they will sell in the Far East.

That could happen, because China is not its own enemy. It is very likely that Russia needs money, and since the raw materials that have been sent to Europe so far now have no market here, the cheap raw materials on offer are more of an opportunity for China.

But it should be remembered that, although both are huge in territorial terms, they are still not in the same league. For this, one only has to look at the GDP of the two countries.

The GDP of Russia and China 2000-2020
Russia can turn to China mainly in the field of raw materials, as it has no technological advantage that would interest China to any significant extent. It is another question of how the implementation will look, since, for example, the construction of the gas pipelines needed for transport has not yet been sufficiently solved.

The impact of the war on finance

At global level

Trading has either been suspended or you could see significant exchange rate losses. With the dollar being the world’s fleeing currency and the US Treasury bond being the world’s fleeing investment, if it is needed to find a safe place for the money quickly, many people will choose one of these two. And that leads to a temporary rise in the exchange rate.

Here, for example, you see a strengthening of the dollar against the euro.

USD strenghtening against EUR


Because of the geographical proximity, there are also many Hungarian aspects to the war.

Impact in Hungarian terms

The Hungarian forint appreciated spectacularly in January as a result of the interest rate hikes, but what it gained then and there it has since lost because of its geographical proximity.

USD HUF exchange rate


According to the MNB, there is no fundamental background to the current situation, so once the conflict is resolved, order is expected to be restored (the MNB is of course monitoring events and will intervene if necessary).

Impact on investments in forint but in other currencies

For investments where you as an investor have paid in forints but the investment fund manager has invested in dollars or euros, you may see a significant increase in the exchange rate even if the value in foreign currency decreases.
Take the bond market as an example, which is currently weakening due to the high inflationary environment.

Let’s say you bought a bond worth 100 Euros when the exchange rate was 360 Ft/Eur. You then paid 36,000 HUF for it. Now, when the exchange rate is 381 Ft/Eur, if the exchange rate were, say, 3 Euros weaker, you would no longer get 97 Eur * 360 Ft/Eur = 34,920 HUF, but 36,957 HUF. (This puts you at a disadvantage when buying the exchange rate.)

Effect on the exchange rate of Hungarian companies.

If you look at the index of the Hungarian stock market, the BUX, you can see that it has fallen significantly since the conflict broke out, and with it the ETFs that track the BUX have fallen.

BUX exchange rate

The main reason for this is typically geographical proximity, which means that even companies that don’t have (significant) Russian-Ukrainian exposure are easily underpriced. These companies offer a good buying opportunity, as they are underpriced by the market for no fundamental reason (the prerequisite, of course, is as always careful selection)

What can we expect from the investments?

The still high inflation globally and the central bank response to it are creating uncertainty.
Markets are nervous , volatility has appeared which would be present even without the war. But a recession should not be expected unless the Russia-Ukraine conflict spreads to the global level.

Expect central banks to reduce the money supply either by stopping bond buying programmes or by raising interest rates.

What are the reasons for inflation remaining high for some time?

Wealth accumulation of the US population

At no time in history has the US population had as much saved wealth as it does now. This is logical, because they have not been able to spend their money for 2 years. They consumed only online, but they did not replace consumer durables because they were uncertain of the outcome. This pent-up demand exploded into the world.

Shutdown of global logistics lines

There are product shortages, so companies are raising prices. They say they don’t have enough product, but if you want to buy it, pay more for it.

It’s not just a profit motive. Transport costs have also gone up significantly because of tight capacity, and there are other costs, such as labour, which have also gone up. So even if they wanted to, they might not be able to sell it cheaper.

People are insensitive to this price increase because of the large accumulated savings, at least for now.

As the world economy recovers, transport routes will also recover and this will lead to the emergence of competition, which will put downward pressure on prices. But this will take time.

Situation in Russia and Ukraine

The Russian-Ukrainian situation could prolong this inflation due to the exposure to raw materials and could also raise the inflation rate.

This high level of inflation needs to be managed by central banks. The situation is expected to moderate around the beginning of 2023, but is not expected to return to the low levels seen before the covid. That has already shown deflationary problems.

What do you see in investment now?

We are moving from a declining interest rate environment to a rising interest rate environment. You’ve heard before that the bond market performs poorly in such a situation, so we’re going to focus mostly on equities.

The real yield available is falling due to high inflation. But for stocks that perform above inflation, the question of funding arises. It happens that when the base rate rises, the interest rate on loans also creeps higher, so it is somewhat harder to perform well.

During the quarantine period, technology stocks performed well, but in this environment it is a different story. Some sectors traditionally perform well in a rising interest rate environment and some perform poorly.

Which sectors perform well and which sectors perform poorly in a rising interest rate environment?

Good performing sectors Underperforming sectors
– pénzügy
– energy
– industry
– raw material
– luxury goods sector (with strong brand loyalty)
– IT
– health
– service
– real estate
– public utility
– basic consumer goods

In a rising environment, value stocks perform well.

But 2022 will require activity from an investment perspective. This is best achieved either with a properly selected actively managed investment fund or with a competent private banker. If you do it yourself, you need to choose not only the sector well, but also the companies within it. (But you can also choose from several asset classes)
The reason for this is that you can further divide into groups within the same sector, and even firms within the same sector but belonging to different groups can behave completely differently.

For example, just because historically the IT sector has underperformed in a rising interest rate environment does not mean that this will be true for all companies. Many growth stocks can outperform. And it matters which geographic region they operate in.

What can you do as an investor?

Stay calm!

Panic is the worst advisor. Not just now, but when financial professionals have looked at the performance of the riskiest period of any period, they have found that those who stayed calm and didn’t sell at a discount have far outperformed those who panicked and fled their investments.

Choose actively managed solutions!

The two most commonly chosen investment strategies are active and passive.
In the current environment of uncertainty and frequent falls, actively managed portfolios often perform better. If you do not manage your own money, active management is typically available through private banking and actively managed investment funds.
These allow the investment manager to make individual decisions on portfolio changes, while ETFs are obliged to track the index they copy even if they suspect a fall is coming.


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