Inflation in the eurozone reached a new record high of 8.1 percent in May. After much hesitation, the European Central Bank has now also heralded the turnaround in interest rates. The significant price corrections in recent days and weeks have already made it unmistakably clear what this can mean for shareholders. Nevertheless, for more risk–averse investors, opportunities on the stock market could still be available – or perhaps right now.
Current market assessment by Michael B. Bußhaus, Founder and Managing Director of justTRADE
Frankfurt am Main, June 20, 2022 – The European Central Bank (ECB) has hesitated too long – for many experts. But now ECB Chief Christine Lagarde had no other choice, she had to deliver and has delivered, albeit rather timidly. This means: due to the escalating inflation, Christine Lagarde announced a rate increase of 0.25 percentage points for July at the last ECB meeting and promised a further interest rate hike for September. As a reminder: since March 2016, the key European interest rate has now remained at 0 percent. And: The last key interest rate increase took place about eleven years ago.
Inflation: Here to stay
However, with the announced turnaround in ECB monetary policy, inflation will certainly not approach the ECB’s target value of 2 percent overnight, the ECB economists also know that. Finally, the monetary authorities also adjusted the inflation forecast sharply upwards at their June meeting. While the ECB experts predicted an average inflation rate of 5.1 percent in March 2022, they now expect an impressive 6.8 percent.
Investors need to look closely
The fact that further interest rate steps by the ECB will follow after September therefore does not seem to be ruled out, at least. So for the stock market and investors, the uncomfortable times could continue for a while. Especially: not only high inflation and rising interest rates are depressing the mood. The supply chains that are still interrupted, the ongoing war in Ukraine and the economic engine that is losing momentum are also a problem for the stock market traders.
In short: the mixed situation is not only currently challenging, it could also cause increased nervousness in the markets in the future. Caution is therefore appropriate, but investors should certainly not panic now. On the one hand, the future is traded on the stock exchange. A large part of the future developments are therefore probably already priced into the courses. In addition: industry is not the same industry and share is not the same share. Although refinancing for asset values – for example from the utilities or food sector – is becoming more difficult in the course of rising interest rates, the burden on value values is lower compared to growth values from the semiconductor industry or the biotech sector, for example.
However, this does not mean that investors should put every food or utility title in their portfolio. Here, too, it is important to look closely and not to make rash decisions. Opportunities are offered above all by companies with a good balance sheet, experienced management, a stable business model and a strong market position. Only then will the company be able to pass on the rising prices to its customers comparatively easily.
Even well-positioned banks, which have suffered particularly badly from the zero interest rate policy for many years, should get through the interest rate increase phase comparatively well. The reason is that the higher interest rates are usually passed on fairly quickly for loans, but the financial institutions on the investment side often find it difficult to quickly adjust the higher interest rates. But beware: if a recovery of the economy is delayed, one or the other credit institution could also come under pressure.
Reduce risks and preserve return opportunities
There is no doubt that high inflation, rising interest rates and the weakening economy are creating an environment that is also challenging for the stock market. Especially in times of high inflation, however, stocks are still almost without alternative for investors. Although commodity and crypto assets are also suitable as a deposit mix, stocks score as tangible assets in inflationary phases with a more promising risk-return profile.
For investors with a clear compass, there could even be more opportunities than risks after the price corrections, since stocks have now reached valuation levels that suggest quite attractive return opportunities. But not every private investor – depending on his individual risk-return profile – has the time and the know–how to identify the most attractive individual securities for his goals. For all those who still do not want to passively accept the loss of purchasing power, fallow ETFs are an alternative that represent a variety of values and thus reduce the risk of loss.