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We look forward to a 10-year period in which inflation and rising interest rates will characterize the world economy: Dániel Móricz and Tamás Cser, experts at Hold Fund Management, spoke about this in a background discussion held on Thursday. According to them, the Hungarian economy and Hungarian companies can emerge well from these processes, but the forint is expected to weaken further in the coming period.
Inflationary pressures are high
According to Dániel Móricz, investment director of the fund manager, the global economic crisis caused by the coronavirus is quite atypical in many respects, not very similar to, say, the financial crisis that began in 2008, and all these differences point to a higher inflation in the future. On the one hand, during this crisis, in addition to central banks, governments also injected a lot of money into the economy, which, in addition to companies and investors, also reached the average citizen, who then spent it in the store. or restaurants. As a result, in the United States, for example, the amount of money in the economy increased by 25 percent during the epidemic.
So much money for the last time in II. it was in the economy during World War II, even thanks to public spending.
Even after the 2008 financial crisis, many were concerned that central bank stimulus policies and bond buying programs would lead to inflation, but this did not really happen, only the prices of stocks and similar assets rose. because most of the money flowed in. here. Now, in turn, governments have given a lot of money, in the United States, for example, on Friday the president will sign the sixth economic rescue package, according to which the majority of American households will send $ 1,400 directly to the federal state. .
Other countries (with the relative exception of Hungary) have distributed equally generous grants, either in the form of Kurzarbeit programs or other grants. All of this leads to such a strange situation that during this crisis, for many people, their savings not only decreased, but even increased. In the United States, for example, savings have increased by $ 1.5 billion. For those who have not lost their jobs or received some kind of government assistance program, they have money, the problem is more that they do not know where and what to spend.
However, when this demand rushes into the economy after opening, it will suddenly lead to high inflation. On the one hand, because a large amount of money will suddenly enter the economy and, on the other hand, because while the demand will be huge, many shops, restaurants, pubs, individual service providers will close or go bankrupt during the epidemic, thus reducing the supply that serves the demand. Stocks, which are running low relatively quickly, will have to be replenished quickly and the price of shipping, especially ocean freight, has already doubled or tripled. These, in turn, are short-term effects that fund management experts say will fade over time.
However, there are also factors that increase inflation in the long run. According to Dániel Móricz, the last 40 years have been characterized by global trends that have had a greater effect on price increases: continuous technological development, globalization of production, growing inequalities and the interest rate policy of banks central. However, globalization is also expected to slow further in the future, and inequalities will lead to growing dissatisfaction, to which governments will have to respond sooner or later. In addition, demographic trends can also drive inflation, because as societies in more developed countries age, there will be more and more dependent people, leading to decreased savings and increased consumption, which can also increase prices.
At the moment, of course, one can only guess to what extent these factors will lead to higher inflation in the long run, and neither investors nor analysts have much starting point because the economic situation triggered by the coronavirus has yet to materialize. . very exemplary. If, on the other hand, inflation rises steadily, central banks will be forced to intervene, tightening the interest rate environment, which could have a spillover effect on the entire world economy.
The bubbles come down
This interest rate policy will also affect equity prices, including market bubbles that have formed during the epidemic. The current crisis is also atypical in that when we look at the prices of stocks, mainly the US equity markets, it does not appear to be a crisis. In addition, during the epidemic, many small investors invested money they could not spend in the real economy, which in part led to strange market phenomena such as the Gamestop scandal, which means that small investors gathered on Reddit fired a company relatively worthless, partly for fun.
Several huge bubbles burst in the US stock market.During the epidemic, the price of green energy, electric mobility and innovation companies skyrocketed, and the stock market for such stocks increased threefold, fourfold, and, sometimes five times in late 2020.
If, on the contrary, investors expect high inflation and a more restrictive interest rate environment, there will be an increase in real bond yields, in parallel with which these market bubbles are expected to fall. According to Móricz, we may already be seeing the winds of this, as the prices of such inflated stocks have fallen 30 to 40 percent in the last month and a half. This has also happened with the price of Tesla shares, which according to the expert is perhaps the best example of this type of action.
This, in turn, should not lead to a stock market crash, because these trends were only characteristic of the prices of certain companies, of certain sectors, not of the stocks of many companies at all.This is because the stock market has split into two, the so-called not-so-monetary but high-growth stock market. growth stocks and value stocks that have long matured and have an existing market. The current crisis has triggered balloons in the exchange rates of the old companies. Many compare the current period to the dot-com crisis of 2001, when the Internet business bubble burst, but overall, the US stock market did not collapse either.
According to Tamás Cser, Hold Fund Management’s main equity portfolio manager, it may even strengthen European equity markets, especially Eastern Europe and Hungary, if yields and interest rates rise. In these markets, there are many more value stocks, plus bank stocks are quite important, and it’s especially good for bank and insurance company profits if interest rates go up. These sectors have suffered a lot in the interest rate environment of the last 10 years and investors have also sided with them.
Big money, debilitating florins
When it comes to Europe and its eastern half, the next two or three years will be a staggering amount of money. The main reason for this is the EU Crisis Management Next Generation program, as part of which, for example, Hungary will receive 4% of GDP in 2021-22 and 3% in 2023. Other countries in the region will have even more money, with Croatia, for example, receiving more than 15 percent of GDP by 2023. The question will be how governments can spend so much money and how much will this lead to increased demand (it is true that in the next seven years, Hungary will even With the money from the next generation, you can expect less support from the EU than in the previous week. year.)
Governments, on the other hand, do not have to worry about what to do with budget deficits that occurred roughly during the epidemic. In the aftermath of the 2008 crisis, severe austerity measures were applied in Europe, sparking another wave of crises. Governments, however, have now realized that they will never have to pay off their borrowed debts if central banks are willing to finance the state. However, this has happened during the epidemic and is not expected to change, and even inflation will reduce the accumulated debt.
However, the change in the inflation and interest rate environment will have another effect, which is not good news for Hungarian consumers: the forint is expected to weaken further. Developing region currencies, including the forint, have also weakened in the last month as real yields in the United States have started to rise, which is why investors want higher interest rates on US bonds. peripheral countries. In Hungary, the interest rate is still very low, so the forint may weaken until it rises.
In addition, according to Dániel Móricz, this trend may continue for something that has nothing to do with Hungary. In Poland, where the interest rate policy was followed, which was very similar to the Hungarian one, and the zloty was devalued, loans contracted in Swiss francs remain an unsolved problem, which must be resolved in some way within a period of time. six months. This could mean that Polish banks would have to buy a large amount of francs on the market, in parallel with which the zloty would weaken drastically. This can easily drag the currencies of the region, including the forint.
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