Just two weeks ago, on the financial horizon there was a cascade of interest rate hikes by the central banks of the eurozone and the United States. Good news for savers and investors and bad news for those who pay a mortgage. But on February 25, Russia invaded Ukraine and the landscape has changed substantially and now what prevails is uncertainty. What is going to happen? Central banks face the same dilemma: raising rates can put obstacles to economic growth, but maintaining them does not help curb inflation, which, in the case of Spain, closed last month at 7.4%, a level not seen for 33 years. This is without counting the effects that the war in Europe is going to have on prices, particularly due to the foreseeable rise in gas prices and many other raw materials. The Federal Reserve (Fed) says that, despite everything, it will raise rates in March, although everything indicates that it will do so more gradually than expected. Now it remains to be seen what the European Central Bank (ECB) does, which before the conflict had already been more cautious but with the expectation of starting the path of positive rates this year.
The director in Valencia, Castelló and the Balearic Islands of Renta 4 Banco, Juan Espinós, abounds in the confusion in the markets: Some believe that the monetary institutions will remain quiet, but others believe that they could be more aggressive than expected, precisely because of the high levels of inflation. The deputy director of the Valencian Institute of Economic Research (Ivie), Joaquin Maudosconsiders that, “with February’s inflation and the increase expected due to the increase in the cost of energy and other products, the pressure to raise rates increases. My impression is that the central banks will be sensitive to this situation”, although “the rise will be reduced”.
In this situation, what should savers do? If rates rise, public debt and bank deposits will start to become attractive again, although large returns should not be expected or quickly produced. Prickly estimates that the official price of money will not exceed 1% this year and, therefore, what banks or insurance companies can offer through their savings products will be scarce, much more so if we take into account that financial institutions, for The ECB’s policies to fight the pandemic have a lot of liquidity and do not need to collect money from citizens. So there will be no liability wars. Maudos he believes that, in the case of deposits, interest “will remain at levels close to zero for quite some time.” Regarding public debt, the expert has no doubt that it is now a poorly paid refuge asset “in the face of the uncertainty of the war” although, in the medium term, if rates rise, interest will also rise.
So it is complicated for savers who flee from risk, mainly because they find themselves locked in the trap of inflation, which, being runaway as it is, makes them lose income. It certainly happens with deposits and with fixed income. “Everything that is not risky is in loss of purchasing power,” he says. Prickly. But riskier investors don’t have it much better. In investment funds, those that are referenced to national equities [léase bolsa española] beyond a year they offer yields lower than the 7.4% that inflation was at the end of February. They also lose.
Bill Joaquin Maudos that the fall that the stock markets are experiencing is due above all to the outflow of money towards safe haven assets such as public debt or gold, the latter with benefits for those who invest in it, according to Prickly. But the professor of Economic Analysis points out, regarding the stock market, that “history shows that, in situations like the current one, it ends up recovering and not for too long, as we could see with the pandemic.” “I don’t know if it’s time to go public but – in his opinion – it’s not time to go out.”
In Renta 4, its manager indicates that, if growth is maintained, “the stock markets should not go badly and, in addition, many values are low in price.” The banks, precisely because of the prospect of earning more with the rate hike, and the energy sector are two of his investment recommendations, while he asks to flee from long-term fixed income, because it will not pick up the rise in the price of money. “Now more than ever, every investor needs to review his portfolio and be cautious,” he says.
In a time of great confusion and fear, Maudos believes it “optimal” to dedicate part of the savings not to increase wealth but to guarantee a more comfortable retirement and, therefore, advises allocating part of the money to pension plans. Here the professor is conclusive and assures that the benefits of the future “will be less generous, with more years of life and, sometimes, of poorer quality, therefore, it will be important to accumulate savings for the future.”