Inflation is skyrocketing
Earnings on the stock market are pain and suffering
By Benjamin Feingold
The currency devaluation is currently around 8% in the euro area. This is exactly what stocks actually offer on average in terms of returns. It sounds like a good balance, but right now you need to use old wisdom.
Capital gains are compensation for pain and suffering, as Andre Kostolany once described it. First comes the pain, then the money. This is all the more true in times of inflation. Because at first glance, stocks are actually the perfect solution for savers to escape the ongoing depreciation. By investing in companies, you invest in real assets and you will benefit from rising prices. On the other hand, bank deposits lose value when inflation is high.
Unfortunately, however, equity markets are currently down while inflation remains high. “It will not weaken anytime soon. Due to the severe failure of Ukrainian and Russian grain deliveries, food prices will continue to rise and are likely to replace energy prices as price drivers. Second-round effects are also foreseeable. on wages, “says Stefan Riss, capital market strategist at Acatis Investment
For stocks to be beneficial to investors, the return generated must exceed inflation. An ideal environment for equities is therefore a low general price increase of 2-3% per year. Depending on the index, investors have in the past been able to achieve a medium-term real return of between 8 and 12% per annum.
However, the higher the inflation, the lower the yield. This means that investors are not hedging inflation risks with equities, especially in the short term. But over the long term, major equity markets have always risen and inflation has always gone green.
The turnaround in interest rates is here
Skyrocketing prices are often the result of surprising developments. Delivery bottlenecks due to strict blocking rules in China and the war in Ukraine are a good example of this. But at some point, oil prices will drop again and supply chains will run smoothly. So anyone who wants to see stock gains currently needs patience and has to endure price losses.
However, we must also take into account the turnaround in interest rates initiated by the US Federal Reserve and the ECB. Higher interest rates mean that stocks are becoming less attractive than other forms of investing. And they make financing more expensive for companies by making their profit forecasts less certain.
Also, companies’ future profits are less valuable due to higher interest rates in the present, because profits are discounted more. This is impressively demonstrated by the losses in tech stocks, which mainly benefit from long-term growth fantasies. Stocks such as Netflix, Delivery Hero, HelloFresh and Zalando have lost value very markedly since the start of the year.
However, it is worth investing in long-term stocks. It is currently possible to lay a good foundation, for example through quality stocks with dividend payments that cushion inflation.
Value stocks are becoming more and more popular
“Few companies are immune to high inflation and can pass rising prices on,” said Ricardo Evangelista, senior analyst at ActivTrades. Strong brands, solid balance sheets, a large customer base around the world, high product quality, flexibility in purchasing and manufacturing, as well as economies of scale are key factors that lead to strong pricing power towards customers and suppliers.
Companies that generate high levels of liquidity and therefore have little problem with rising refinancing costs also have an advantage. “The Pacer US Cash Cows 100 index has risen 9% since the beginning of the year, while the S&P 500 has lost 13%,” calculates Jürgen Molnar of broker RoboMarkets. The index includes 100 companies that generate the highest free cash flow returns.
These classic stocks of substances are considered boring in normal stock market times. But now they are among the favorites, including consumer goods stocks like Coca-Cola and McDonald’s, oil and commodity giants like BHP and Exxon, and tobacco companies like Philip Morris and British American Tobacco. Such companies can also be found in Germany. In the Dax, Deutsche Telekom and RWE have recorded a strong rally since the beginning of the year.
Benjamin Feingold runs the stock exchange portal Feingold Research.
This post is not a recommendation buy or sell shares or other financial products The correctness of the information assumes no responsibility.