Investing under terms of higher inflation

 

Author: Dragan Ilkoski

Most expected announcements of the capital markets for several quarters already are those related to the inflation measuring, although it is already evident to everyone at the global level. These data, following the publishing by the central banks (now higher than the projections that the central banks had for year 2021), have serious impact on global markets and determine the investment strategies of all participants. Thus, in the first half of year 2021 we witnessed the tremendous growth of major part of the raw materials, partially caused by speculation motives followed by their large correction, as well as evident repositioning of the global portfolios toward investing into companies with longer history of positive results, excellent market positioning, stable dividend policies and major and valuable brands. These companies, largely part of the still active bull market cycle, were at the margins, on the account of generally young technological companies which were projected to have huge annual growths (in terms of income, market penetration, technological achievements, etc.) in early phase of development with extremely high capital needs and negative financial results. Although the reasons for this “growth to value” rotation could also be identified at many other places, expectations for pacing up the inflation rates and consequent expectations for interest rates growth, which would contribute to lower values of the future discounted cash flows, are surely to be one among the major ones.

During this entire period the largest central banks diligently defended their expansive monetary policies, identifying the growth of the price levels as transitory, mostly caused by the distorted production and distributive chain supplemented by speculative market movements, as well as the increased current consumption as a result of abolishment of the quarantine measures around the world, the vaccination and in general, more free functioning of the entire world population. Despite of the assurances of the central banks, as well as part of the investment world which support the thesis by the central banks for the transitory nature of the inflation (a thesis that the world due to their level of technological advancement and huge labor productivity is in naturally deflator state), the price of the bonds noted certain decline and increase of the interest rate level (e.g. interest rate of the 10 year bonds issued by the USA raised from below 1% at the beginning of 2021, to the level of 1,6% at the moment).

After the relatively stable summer of the capital markets, these fears are getting the momentum again in the last month, additionally supported by the unstoppable growth of the energy fuels price, so once again we are following up the above stated situations at the markets.

The situation is similar here in Macedonia, too, by being an import dependable country, it imports this inflation also. Statistics shows that the pacing up of rates, and from what we, at the Securities Services Department of NLB Bank, can see on spot, the citizens begin to incorporate it more frequently into the process of reaching their investment decisions. The situation at the Macedonian Stock Exchange is taking again certain pace, so for the last month we have an increase of almost 6% of the MBI10 index, in a period which, usually in terms of seasonal time, is featured by relatively calm trading and small price volatility. In addition, because of the possibility that the Macedonian residents may trade via NLB Bank at almost all world markets, evident is the increased interest for these services, even more because of the tremendous investment possibilities they offer, as well as the need for wider diversification of the portfolio. If you add on to this almost 6% growth of prices for the residential living in Skopje in the last quarter, we may establish that our citizens are rapidly converting the cash toward other investment classes.

Which investment historically represents certain protection against inflation and which of these investment classes are available to the Macedonian citizens?

Most probably, there is no perfect protection, through the history, in different periods, different classes and instruments have proved to be good hedge. Almost all investment authorities even now recommend higher diversification between shares in financially stable and good market positioned companies which generate higher positive cash flows, shares in companies that produce raw materials or direct investing into raw materials via ETF, immovable or investments in REIT funds, as well as investments in ETFs related to the leading world indices.

Crypto currencies as new investment type are becoming to be more represented in the investment portfolios and the analysis of the largest world players at the capital market, also as instrument for protection in inflationary environment. Certainly, it is the most speculative part of this universe, so it should be approached with extreme caution.

For the passive investors, those without much of knowledge of markets or needed time to follow up the developments related to these, the rock star of the investment world, Warren Buffett, is suggesting investments in EFTs correlated with leading world indices, as are S&P500, STOXX600 and other.

All these instruments are at their disposal and are already present at the investment horizon of the Macedonian investors, in addition to the investments in the largest and most profitable Macedonian companies, which noted serious growth in the past few years.

Our role at the NLB Bank, and I hope of the other participants at the capital market in Macedonia, is continuous introduction of our clients with the possibilities for investing, communication and education for the market developments and mechanisms, detection and presentation of all relevant risks related to the investing, as well as creation of stable and efficient infrastructure through which our clients shall have possibility to create portfolios as per their appetite, thereby providing more peaceful sleep for themselves in this world full of challenges.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

four × 5 =