inflation in October reached 2.3% and any profitability they get below that level means that the saver is losing purchasing power. Something that endured by millions of spaniards who have almost 600,000 million euros in current accounts and deposits that they hardly give a 0.10% of profitability. “Inflation seems to us one of the big risks for the next few months and what we think is more dangerous is that we see that the market does not seem to pay much attention. After a long period with prices very content, it is logical to think that portfolios need some adjustments to protect the investment in a high-inflation environment,” explains David Ardura, managing director of Gesconsult.
To make matters worse misfortunes, the bad behavior of the indices of the Bags has been prevented by way of deposits or investment funds is able to successfully beat the inflation; on the contrary, because they are in losses (with exceptions). There are very few countries in the developed world that currently offer real yields (net of inflation) to their savers. Italy, the united States and China are the exception, with a return on their debt that exceeds the cost of life.
Inflation was not a problem years ago, when the economies went through stages of deflation, i.e. falling prices. But we are living in a situation very unusual in markets. The purchase of government debt and corporate bonds by the European Central Bank (ECB) and the decision to place interest rates at 0% have taken out a negative rate to a good part of the debt, or to rates are very low. As an example, the bonus Spanish 10-year is 1.6% and the German the same term is in the figure of 0.39%. Very far from the inflation data. But these purchases of debt and bonds end up next January. It is the end of the so-called quantitative easing (QE), which will be face to face with an increase in inflation, when the main objective of the ECB is to control it.
Assets that are most and least harmed
“The fixed income is the asset most affected. Inflation is the great enemy of bonds, and even more so in an environment in which rates are low and do not reflect the environment of higher inflation. In any case, the quantitative easing ends in January, and if the instabilities are diluting, the bonds should be reflecting this inflation, resulting in increases in interest rates and losses in the price of the bond,” explains David Ardura.
The expert of Gesconsult explains that in periods of inflation, what usually happens is that the central banks raise interest rates to try to cool the economy and, therefore, nominal bonds fall in value. On the other hand, the behavior of the actions in these periods is not clear and depends on many other factors. Ceteris paribus, an increase in inflation should lead to a rise in the price of the shares, provided that the value of the company is maintained.
What investment strategies should be taken in this context of increased inflation? There are two types of vouchers that help cover the rise in the CPI. “Fortunately, the fixed income offers us instruments that allow you to benefit from a scenario of rising rates (bond floating) or inflation (bonuses linked to it). In the case of the former, are emissions whose coupons are reviewed periodically (typically every three months, although they can be different periods) with a rate (euribor at three months usually) that fits with the rises in rates. This causes the rises in rates, the bond pays a coupon higher each time, adapting to the environment of rising rates,” says Ardura.
Unai Asenjo, founder of Indexed Capital, explains how they work bonds linked to the inflation that began airing in Spain in 2014. “If you buy for 100 euros maturing in two years and pays a coupon of 1%, the first year you receive a coupon of one euro (eur 100 for 1%). If we assume that inflation is 3%, the bonus happens to be worth € 103. The following year you receive a coupon of 1.03 euro (103 euro for 1%), and if you assume that inflation returns to 3%, you get back 106,9 euros (103 [1+3%]). Therefore, it protects from inflation,” concludes Asenjo.
Another alternative is to go to the search for fixed income assets that exceed inflation, something which, in the case of the european debt occurs only in Italy. That’s why the most logical thing is to look for opportunities in other bonds are not governmental, although this involves assuming more risk. “As we now have inflation at 2.3% and with the commissions that are charged, we must look for yields above 3% in fixed income,” explains Rafael Vera, ceo of Buy & Hold. This expert likes the bonds of The English Court with profitability of 3% over five years and, above all, the subordinated debt of banks such as BBVA or La Caixa, offering a 6%, or Deposits, with 9%. “Assets that are vetted to the small investor, but which can benefit from funds for that purchase,” adds Vera.
The expert of Buy & Hold also points to the Bag as a guarantee to overcome inflation: “Historically, equities have beaten inflation, but this occurs in periods of six years.” So yes, consider that a rise in the CPI has winners and losers in the current context: the banks and the insurance companies would be benefited, while it would harm the companies more indebted or to which reference types such as highways or Power Grid.
For its part, Asenjo believes that the best way to protect yourself against higher prices is to buy real assets (as opposed to nominal assets). Among the real assets are stocks, real estate, or bonds linked to inflation, while traditional bonds are nominal assets. The responsible for Buy & Hold also has an impact on the real estate market as inflation guard: “rental contracts are linked to the rise of life”. Yes, James-warning of the risks of non-payment and the variable costs that require the real estate: “do the numbers”.
Belen Alarcón, an associate director at Abante Asesores, believes that beating inflation is the starting point of any investment made. If in addition is added the payment of taxes, means that at present you have to obtain a profitability of 3%, something that today is impossible without taking risks. “Here there is no magic. To beat inflation you have to take risks, and the greatest enemy is to be conservative,” he concludes.