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Investor Overview November 2021

Investor overview

How long does high inflation last? Where is the world economy heading?

Investor overview November 2021.

Foreword:

This article is for information purposes only and does not constitute investment advice. If you have a specific question or would like to invest, please contact us so that a licensed colleague can help you.

With the end of quarantine, everyone has the opportunity to live a “normal” life again. However, this does not mean that everything is fine now.

The economic recovery companied with high inflation.

Causes of inflation

Economic recovery

The economic recovery has appeared everywhere, but differently everywhere.

America

The United States has printed a significant amount of cash to get the economy back on its feet.
Because the U.S. job market is so flexible that a significant portion of employees don’t have notice time at all, if a company wants to save on wages, it doesn’t even have to pay the laid-off worker from that afternoon.
That is why the population, which accounts for a significant share of GDP, was supported there. With this, they achieved that there was money for consumption, which made production necessary, and at the same time the companies remained.

Europe

Europe, on the other hand, has a different human resource management, as the 2008 crisis has shown. Even though a company laid off its workers, the amount due for the notice period was debited to the fund for months. So it was very difficult to recover from the 2008 crisis because they did not dare to hire a worker so that there would be no setback and they would have to pay for months again.
With this in mind, many European governments have supported companies to ensure that they do not lay off workers and have money to consume.

Reduced supply

This is due to difficulties in the supply chains. In many places, ports are no longer able to handle the amount of traffic that transhipment would require, so the goods do not arrive at their destination.
Some manufacturers have gone bankrupt during quarantine, so there are fewer manufacturers, they are harder to deliver, and buyers want to buy much more.

Increased demand

During the quarantine caused by covid, the purchase of durable consumer goods stopped, everyone waited. They did this on the one hand because of the uncertainty, as they didn’t know if their job would stay, and on the other hand, they couldn’t really go and buy. Because of this, the current crisis has caused a very sudden and very deep downturn.

durable goods order
Source Durable goods order

After the quarantine ended, however, everyone thought about spending the money they had accumulated until then. And this would have been impossible to serve even before the covid. For this reason, it has a price-increasing effect in itself.

The result

Such significant global inflation was last seen in the late 1970s and early 1980s, so there is very little practical experience with it.
Analysts expect that a higher level of inflation will still remain with us for the next 6-8 months. This amount of time is absolutely necessary for the shopping fever to settle down and for a new competitive situation to emerge.
This new competition alone will be enough (with supply chain regulation) to curb inflation. Equilibrium is expected to be slightly above pre-covid levels.

What can a central bank do to control inflation?

The central bank of a larger country basically has 3 tools to regulate the economy.

  • prints / stops printing money
  • if necessary, it will pump out the money that has already been printed
  • reduced / raised interest rates

(Due to the size of the Hungarian economy, the Hungarian central bank has relatively few options, which is mostly due to the increase in interest rates.)

What processes can you see in the economy?

America

America accounts for 25% of the world economy, so it’s important what processes they face.

Consumption

Here, 68% of GDP comes from household consumption, which is why it has stepped in to support the population with direct cash.
However, this money could not be spent during the quarantine. Now, that the quarantine situation is over and Christmas is coming, they want to spend the money.
America has struggled with deflation problems so far, so their decision is not based on the current level of inflation, but on a medium-term average. As this average is still within the target range, they will not raise interest rates.
Low interest rates are encouraging companies to take out cheap loans to meet increased demand, further spinning the economy and taking back laid-off workers.

From the sharp fall in the quarantine unemployment rate, you can see that the latter goal has been achieved.

american unemployment rate
Source

Cash to stimulate the population, on the other hand, has resulted in a situation where many people earn more than if they were working. Because of this, they prefer not to work. About 3 million people are currently missing from the U.S. job market.

What can companies do to maintain production?
  1. One option is to offer a higher salary.
  2. The other option is to look for cheaper labor, say they employ immigrants.
  3. The third thing most of the less well-off companies do is not produce at all.

Because most people today, especially out of coercion, choose the first route, they incorporate this into their prices and burden it on the consumer. This further raises the level of inflation.

Economic situation

As a result of the quarantine, the performance of the economy declined, so the printing presses were switched on immediately. It is clear that very significant money has been pumped into the economy in order to balance it.

USD cash printing

This was, of course, accompanied by a significant jump in public debt. The result is also visible, both in economic performance and inflation, which is currently around 5%.

As they have previously struggled with deflationary problems, they are not watching the current level of inflation but a medium-term average, so they are not expected to raise interest rates yet. This means to you that further growth is still expected within this period (until about the end of 2022).

You may ask, why not collapse like a castle of cards?

The question is right, after all, if a single state did so, its currency would be immediately devalued. It keeps the system in balance and alive so that everyone does it so they balance each other out.

China

China was the only country that, although declining slightly in terms of GDP last year, was not in crisis. The reason for this is basically that he was able to take its population home in time and the money they would otherwise have spent abroad changed hands within China.

What processes are taking place in China?

The September investor overview has already shown that China is currently making changes in several directions. The price of many Chinese companies, as well as the price of the asset fund that holds them, reacted negatively.

This is a panacea, as China has sacrificed very short-term, more company-specific growth on the altar of long-term growth.

Data protection

Ali Baba and Tencent were already discussed in September, something China’s decision is about is only alarming because it was able to implement it relatively quickly. After all, in the Western world, this has long been known as GDPR.

Harmonization

China’s production is provided by a strip of roughly 500 km on the east coast. Although it recovered very quickly from the recession, it was a K-shaped recession. That is, a stratum has started up, but 80% still live in deep poverty and have no chance of rising on their own.
With many billions of people involved, maintaining peace of mind is paramount. The emperors had already done much to avoid revolutions at that time, and now the current Chinese leadership has decided to do the same.
For this reason, it was necessary to e.g. education is being reformed. It is widespread that without a very expensive tutoring, there is no chance of getting into university, and this has further opened the scissors in society.
But harmonization has also had an impact on the composition of society. Today, most work in the service and fewer and fewer are in agriculture, meaning a significant middle class is emerging.

What does this mean for you?

If you’re a speculator, you’re not doing much good because you don’t know where the exchange rate will move.
In the medium to long term, however, fundamental analyzes suggest strong growth. By 2030, 2/3 of the world middle class is expected to be in China, and this will have a strong impact on the composition of consumption.
So if you have a long-term capital build, investment, or anything else on a unit-linked type or securities account, this offers you the option of a entry point.

Why is there no soaring investment in Chinese equity mutual funds?

Fundamental analyzes show growth, which markets typically follow in the medium to long term.
In the short run, however, the market is emotional, after all, people make decisions. Accordingly, bad news is enough, and in the short term, a downturn is almost guaranteed. This will sort out your queues in the long run.

Evergrande

You hear a lot about Evergrande’s payment difficulties, portrayed as a giant in the real estate market. Although it is a huge company, so big, that only its debt is the double of Hungarian GDP, the whole company is dwarfed by China.
The entire company accounts for only 2% of the real estate market, and when viewed from here, it is no longer that big. What may have made it into the news is not only its numerical magnitude, but also the fact that the problem could spill over into China’s entire real estate market after Everbrande’s eventual liquidation.
However, let us not forget that China is a communist state, which is particularly good news in this regard. This is because power is highly centralized, so its central bank is not independent either, so it can boom around the problem very effectively before it can cause any more serious problems.

 

Hungary

No significant strengthening of the forint is expected in the foreseeable future.

The advantage of a weak forint

Hungary’s export exposure is large compared to its size. Within this, car production is dominant mainly towards Germany.
As the shortage of chips in many places has led to the cessation of production, it is becoming more and more worthwhile for the parent companies to keep Hungarian jobs and stop production elsewhere due to the weakening forint.

With the settlement of the coronavirus situation, tourism may flourish, and in the eyes of foreign tourists, Hungary may be a cheap, competitive destination.

The disadvantage of a weak forint

Imported inflation is realized with a weak forint. The most obvious example of this is oil.
As long as $ 1 costs HUF 300, $ 80 per barrel will cost HUF 24,000. The same costs HUF 24,800 at 310 HUF / USD without the price of oil moving by a single cent.
This obviously spills over into industrial production, heating, transportation, transportation, and everything else.

The oil

The barrel of crude oil is currently as high as $ 80 a barrel, and you’ve seen a significant increase over the past year.

Crude oil price 2020-2021

The reasons for this can also be found on the demand and supply side.

Demand side

Suddenly the economy started, everyone wanted to consume. This has led to multiple demand from oil. On the one hand, the demand for oil and oil products has jumped in terms of fuel supply, and on the other hand, oil is not just fuel. Among other things, it plays an important role in the production of plastics. Although humanity is trying to use less and less plastic, there is still a strong demand for it.

Supply side

OPEC was not able to make this quantity available to the market at the same time, so a price increase can be observed due to reduced demand. However, mainly in America, there were shale oil and shale gas companies that bleed during quarantine. This obviously does not mean that the extractive well has ceased to exist, there is only no one to operate it.

What is expected?

According to experts, the price of oil will be between $ 55 and $ 60 in the long run from the current 80. There is currently no reason to make it significantly more expensive, and a price above $ 100 is already having a recessionary effect in itself, which everybody really wants to avoid.

Environmental Protection

It is becoming increasingly clear that we need to do it for a sustainable environment, and that can be done with the use of green energy and sensible planning.

Green house gas emission by sectors

Advances in environmental protection are a good indication that the general standard of living is improving. After all, as long as life expectancy at birth is 40 years, much of it in the mine, no one will care what effect polluted air or water has on 50-year-olds. But as life expectancy is 75-80 years, and this is accompanied by a significant amount of economic power, quality of life will be important right away.

To this end, China is no longer only building coal-fired power plants domestically, but is no longer selling such technology. This approach works in small ways, if you look at the Hungarian heavy industry cities, you can see that more and more attention is being paid to environmental protection.

The economic impact of this

Renewable energy

It will be cheaper and cheaper to produce them. While 10 years ago, solar energy was the most expensive, today it is one of the cheapest energy sources.

Transformation of real estate utilization

Industrial properties are responsible for a significant percentage of greenhouse gas emissions. This is mainly due to the energy required during operation. Due to uneconomical design, it should either be heated unnecessarily or cooled in summer due to lack of shading. Its transformation will have an impact on the real estate market and, through it, on real estate investment funds.

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

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