Investor overview October 2021

Investor overview

The downturn caused by the coronavirus has now turned into growth, but central banks need to intervene before inflation, along with the booming economy, goes beyond a target range.

Foreword

The writing published here is for information purposes only and does not constitute financial or investment advice in whole or in part under the law on it.

History

In the spring of 2020, there was a very sudden decline due to Covid-19. After the decline caused by quarantine, there was a significant and very sudden increase worldwide.

This significant increase was due to fiscal and monetary policy decisions worldwide, extra money was pushed into the economy either directly through asset purchases or otherwise.

This promise of “endless money” very quickly revived the stock market in particular. But the proportional increase in performance was lagged behind.

The reason for the lag

A significant part of the service sector has either been quarantined and is still, or does not know how to plan for the future. In the manufacturing sector, there are disruptions due to supply chain problems.

Current situation

Inflation

Nowadays, you can experience a significant amount of money deterioration, for several reasons.

Shortage of raw material

Chip shortages are a serious problem in mechanical engineering and the automotive industry. Manufacturers have also responded by producing less, producing goods with higher profitability to the detriment of the mass product.
The effect of this can, of course, easily kick back to companies serving car factories, after all, fewer units mean fewer orders.

Speculative positions

This was particularly the case for commodity prices. In these positions, the investor (typically a large capitalist) bets a shift in a given direction and extent. If that doesn’t successful, they’ll lose on it too, but at the same time, large-scale sales will push down prices.

Imbalance between supply and demand

The reason for the imbalance, for example, is that many people stayed home because of the home office, and once that turned out to be the case, they started spending more and more on home renovations as well as furniture replacement.
The significant price increase in the building materials market is also reflected in the price of newly built properties.

The state of stock markets

The money printing already mentioned has significantly increased the amount of money present in the economy that is looking for its way. As it was not just one or two countries that participated in it, a very coordinated stimulus arrived in the markets. As a result, a real rally emerged, there was not a real alternative to equities. Bonds have low yields and you don’t get anything after bank deposits.

The growth in global money supply has also boosted demand for equities. If you look at the picture, you can see the extent to which the US has increased its dollar stocks.

What could you achieve with the shares?

Virtually all stocks performed well so far in 2021, with the exception of emerging market stocks.

There was already talk in the September investment overview that China had significantly changed its internal regulations as it wanted to achieve a way for Chinese techies not to go to the U.S. stock market. This decline has also pushed back emerging market indices, as one-third of them contain Chinese securities.

Aside from emerging markets, however, we look at virtually any stock index, you could have achieved a nice result.

Even in euros, say, watching the Austrian stock index.

You can even invest in HUF in the Bux index.

Who were the real stars?

Growth stocks outperformed value-based investments. The reason for this: very cheap financing, low yield environment. (You can read about the difference between growth and value-based securities in the article on stocks.)

These are typically technology companies like Apple, but we could also mention Google’s parent company, Alphabet.

What makes the exchange rate rise then?

In a low-yield environment, the discounted value of long-term cash flow increases.

Long-term cash flow is the amount that a company will produce in the coming years or even decades. You can read in the post about the time value of money that you can only compare or add up the amounts received later in time by considering the amount calculated for a common date, most often today.

You can do this with this formula:

PV = FV / (1 + r) n

Here r is the discount rate, the extent of which depends on the yield environment. You can see that accordingly, if the yield environment is low, the value of 1 + r as well as its power will be lower. Then you achieved the same effect as if the amount of future cash flows had increased. Exchange rates were mostly driven by belief in this. Although growth is still expected in the next period, it is likely to decline.

What is expected this year?

Emerging markets

Emerging market indices are on the order of 1/3 of Chinese companies. If China settles its lines and there is no disruption in the supply chain, these indexes and the investments based on them are expected to grow significantly.

Raw materials

The price of commodities can be significantly driven by speculative positions, as well as being affected by another quarantine.
In April 2020, the price of crude oil was $ -38. Yes, you read that right, the price of oil was negative.

Because of the quarantine, there was such a surplus that the miners paid for someone to take the oil over from them. One of the winners was China. It started again sooner because of this they needed oil, it also had the storage capacity and it was easier to restart the economy with the oil purchased at very low prices.

Gold

Investment gold has a value-preserving function. That is why it is real-interest sensitive product. Until 2019, we saw a serious rise in its exchange rate, but this was curbed by yield growth. As long as stock prices rise dynamically, gold prices are unlikely to rise significantly.

Real estate

There was a shorter halt, however, due to the fact that no one knew what quarantine and the crisis would result in.
Money found its way, the demand for real estate in itself had a price-boosting effect. The rise in the price of building materials and labor was also incorporated into the price of newly built properties.

Opinions are divided here as to whether there is a bubble in the real estate market or not.
Does the number of constructions started show a bubble? No, there were more in the 2000s
Is the rise in property prices show a bubble? That’s all the more so. An increase of more than 20% in the US may already indicate this.

Hungary

Higher levels of inflation have been circulated through imported products. This has added to the deterioration of money in the economy above the European average anyway, so if the central bank does not want to further weaken the forint’s purchasing power, it will have to raise interest rates, but it is necessary to introduce it gradually. Thus, although inflation targets will be met later, it will less shock the economy. If it did not raise, it could further stimulate the economy, see Poland, but its effect would weaken the forint in the same way as in the case of the Polish zloty. (Higher interest rates, according to the textbook, ie excluding all other effects, make the currency more expensive)

This higher interest rate has also resulted in a rising yield environment, but there may be a slowdown, with inflation expectations built into expectations.

Expected risks

More Covid variants

Emerging viral mutations can easily cause a turbulent period in the markets or even cause a significant halt in growth.

Geopolitical risks

The events in Afghanistan can be an example of this, but any state in an unstable political situation can be listed here. Mostly those that are around a shipping route.

Price-wage spiral

The main question is whether to start. In addition to rising prices, workers will also expect to work for higher wages, which will push inflation away from wage inflation.

Inflation rate

The biggest question here is whether there will be long lasting inflation. Even experts don’t know that. Many believe that the narrowing of supply chains has created a bottle neck effect, so high demand relative to the fallen supply has pushed up prices. Once the supply is settled, everything returns to its normal level.

If inflation is persistent, it can lead to serious problems, as the performance of the real economy here (as discussed at the beginning of the article) does not justify this. This can easily lead to stagnation.

Stagflation

In this case, prices will rise without real economic growth behind them. Then the hands of the central banks are tied, if they raise interest rates, the level of investment will decrease (access to finance decreases, costs increase), which will result in higher unemployment and this will lead to lower demand, thus harming the economy.

And by cutting interest rates, they are heating the economy, at the same time raising the already high level of inflation.

Within the EU, the change of government in Germany

Obviously, this will also affect the economy, and not just Germany, but the European Union as a whole.

The predominance of technology firms in U.S. stock indexes

You could say you don’t buy a technology stock then, but it’s not that simple.

The S & P500 stock index has the 500 largest companies in America. If every firm were given equal weight, a rate of around half a percent would come out. The 5 largest companies are typically technology companies, and their share represents around 5% each.

History repeats itself, but the nice thing about the economy is that no 2 are in the same situation. However, a similar surge in technology companies has already caused a dot com scandal at the dawn of the millennium. If the same thing were repeated now, its effect could be many times greater than that experienced at the time.

One reason for this is that the indexes are followed by a significant amount of ETFs. These index-tracking mutual funds work very efficiently and cheaply, but they cannot filter out such situations. They always buy according to the weight of that stock within the index. Accordingly, these papers are now being overweight and sold in the event of a fall due to the pre-recorded logic. And this can make the situation worse.

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