It Is High Time for Savers to Study How Inflation Harms the Value of Money

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In addition to the imminent deadline for the conversion of kuna to euros indicating that Croats clearly still have quite a bit of savings ‘in the sock’, the first association with Croats is least of all investments (classic savings in banks already are). Nevertheless, part of the population with surpluses is very much aware of the shortcomings of pension funds and the fact that we must start investing, no matter how little or much we can/have. However, the war in Ukraine, which has further accelerated the already existing global inflation, and the moves of central banks that have raised interest rates to stop inflation from rising are taking away quite a chunk of earnings. With inflation still surging, a global recession is also looming, making portfolio restructuring and the question of what to invest in very relevant.

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Ivan Kurtović

—Ivan Kurtović, CEO of InterCapital Asset Management, says that we have received the first signals of a potential recession in the US in the form of an inverted yield curve (long-term interest rates are lower than short-term ones). However, due to the great agility of the US central bank and its determination to curb inflation, he currently believes that a potential US recession could be milder and shorter.

– Although we cannot find much good in the first half of this year, through continuous adjustment of our strategy and portfolio, we have managed to significantly limit losses in certain strategies by increasing the cash component of the portfolio compared to what was initially planned. In our equity strategies, we have positioned ourselves in companies and sectors that are less dependent on economic trends and have the ability to pass on rising costs to customers, thus better withstanding periods of recession. In our bond and balanced strategies, we have positioned ourselves in slightly shorter durations – he states.

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Josip Kokanović

—Josip Kokanović, COO of the Gold Center, states that due to the inflation rate – according to the latest measurement, even 12.3 percent (the highest since the measurement by the Croatian Bureau of Statistics exists) – it is high time for those who have savings to thoroughly study what inflation is and how harmful it is to the value of money.

– If the value of money continues to decrease at this pace, with the same amount of money, in just six years, one could buy half as many products and services. Those who understand inflation have been investing capital for years in asset classes that have proven to be resilient to inflation in the long term. These include real estate, stocks, and investment gold, that is, everything that the state cannot create out of nothing.

Namely, all existing currencies, including the Croatian kuna and euro, are worth only because the state has decided that these colorful pieces of paper are worth something, while, for example, real estate and gold are valuable because there is a limited amount of land, buildings, and precious metals available to humanity. Due to this natural scarcity, both real estate and gold will forever be a better investment than any paper currency. Even the Swiss franc and the US dollar are subject to inflation, as neither of these currencies has any backing; they are valuable due to bureaucratic decisions of the governments and central banks of those countries. Furthermore, these currencies are currently at their strongest levels in the last few decades, so it is not realistic to expect that they can significantly strengthen against the kuna or euro from their current levels – Kokanović specifies.

10 to 20 Percent of Dollars in the Portfolio

In addition to real estate (which we have perfected to perfection), somewhat also gold (which has been extremely popular in recent years), capital markets have never taken root strongly enough for us to approach at least Western European, if not American investment practices. Currently, after all, it is not idyllic there. What are the key investment points until the end of this year?

Kurtović says they expect stabilization of the bond market for the remainder of the year, while they still assess further risks of price reductions in stocks. In the first half of the year, the decline in the stock market was driven by the central banks’ interest rate hikes, which were faster than expected.

– In the second half of the year, if the announcements of a recession in the US materialize, a potential decline in stock markets could be driven by a reduction in corporate earnings due to decreased demand (recession). Although it is always difficult to predict, at the level of the S&P 500 index, in the case of a milder recession, we expect it could amount to 10 to 15 percent. That is why we have positioned our portfolios extremely cautiously to maximize amortization of this new part of the potential market decline.

Historically, the late cycle of economic growth and the inverted curve that marks it are usually periods when stocks perform admirably, making the paradox we find ourselves in even greater. After all, circumstances globally have almost never changed so quickly and drastically, so we are left with no choice but to adapt to the current environment. With such strategies where bonds dominate, we would certainly recommend maintaining some exposure to the dollar as a sort of protection against unfavorable outcomes in Europe (even worse than expected).

However, one should not invest everything in dollars, as it should also be viewed in the context of the euro that is coming, or the kuna that is leaving at the beginning of the year. Our estimate is that it is generally good to have 10 to 20 percent of dollars in the portfolio. Is it currently good to have even more? Probably yes, as I think we could face a more challenging energy situation in Europe this autumn. Additionally, the FED is quite determined in raising interest rates, and the US economy, primarily the labor market, as well as corporate earnings, do not yet suggest a significantly stronger recession – Kurtović specifies.

Gradual Buying

What about stocks, is it worth investing in them during their decline? And in what types of companies? Kurtović states that they still expect increased volatility and potentially negative signs. They recommend using any declines in stock markets for gradual long-term exposure building to global stock markets.

– From stock markets long-term, especially from these or potentially lower levels, we expect above-average returns. InterCapital Global Technology remains the best choice for those with the longest horizon, while InterCapital Global Equity is the best choice for anyone who wants exposure to global equity strategies in general. We certainly recommend further reducing exposure to the SEE region due to the potential spillover effect of the energy crisis from Europe, but not completely eliminating it.

However, regardless of the somewhat negative current outlook on stock markets, we still believe that only through long-term investment in a spectrum of equity funds can one achieve returns that exceed the long-term average inflation rate. In conclusion, bonds could be a good investment towards the end of the year after a long time, and for equity strategies – we certainly recommend adding on declines. Long-term returns in the equity complex will be interesting, especially after some potential new, sharp declines, and thus there is no need to rush at the moment but to buy gradually as the market corrects into late autumn – he concludes.

Whatever you decide to invest in, whether in classic savings, real estate, stocks, gold, or dollars, just compare the inflation rate with the estimated returns on the investment. Or seek advice.