The cure for inflation

Illustrative photo.A photo: Shutterstock

A ghost haunts Europe – the ghost of inflation. He visited all the countries, but he sowed particular chaos in the Baltic countries, writes Swedbank investment strategist Tarmo Tanilas.

Annual inflation in Estonia was 15% in March and 19% in April, setting a European record. At the same time, inflation in neighboring Finland last month was only 5.6% year on year! Exactly the same geographical location, the border with Russia, the euro, supply difficulties, the energy crisis and the coronacrisis. Finland’s per capita gross domestic product is twice ours, the population’s forced spending on food and energy is proportionately less, but the fourfold difference in the cost of living clearly shows that the Estonian people are very worried.

We are rapidly falling into poverty, where average wage growth is three times lower than inflation, and the money stored in the bank is burned before our eyes. Of the five ten-euro notes left in a desk drawer last year, one has become useless. Businesses here are also in a difficult situation. Raising wages at rates comparable to inflation would mean the destruction of competitiveness. If wages rise too little, we will see a return to people commuting to work in Finland, further exacerbating the labor shortage.

People who had the good sense to invest the savings they had accumulated in their bank accounts were in a better position. Last year’s nearly 50% growth of the Tallinn Stock Exchange managed to increase the purchasing power of investors despite this year’s setbacks. Real estate was also a good choice. The median price per square meter of an apartment in Tallinn in April was 25 percent higher than a year earlier, in Tartu by 24.4 percent, in Pärnu by 32.3 percent and in Narva by 28.6 percent, according to statistics from the Land Department real estate agency Uus Maa. However, people with average wages have already had a hard time finding the money to buy housing in new buildings last year, and more young people are blaming capitalism for the fact that they can no longer afford to buy real estate due to high prices.

The skyrocketing prices are increasingly being blamed on Russia for its war in Ukraine. One look at the Bloomberg screen quickly proves that even before the war, the price of oil had risen by more than 50% in a year, and there was no attempt to slow down money printing. Central bankers are behaving like bears awakened from hibernation, moving around hungry and angry, scaring investors in their comfort zones with higher interest rates. Hard-earned savings are becoming increasingly difficult to protect against inflation. Savings rates don’t exist, bond prices are clearly in a bear market, and even gold is trembling in the face of rising interest rates. More and more investors are discovering that the interest accumulated over the years does not cover the loss of principal on several projects. At the Tallinn IPO-drome, the music has stopped, and small and unprofitable companies are unable to raise the desired amount of money through the issuance. A similar picture can be observed on the larger stock exchanges. The outlook no longer counts and investors are looking to get shares in cash-generating companies now to protect the cost of living.

Rising inflation means a change in the rules of the game for investors. As the rise in the cost of living accelerates, expectations of returns on financial assets are rising, and at today’s prices, few asset classes can provide it. Care must be taken not to lose further capital not only to inflation but also to careless investment choices. In the US, inflation was comparable to today’s 50 years ago, when gold, commodities and real estate ownership helped maintain purchasing power. Wide-ranging stock and bond indices fell short of inflation. We are currently seeing a conflict of values ​​in the financial markets, with fossil fuels, weapons and tobacco stocks the most successful sectors this year, and innovative technology and green companies the worst losers. The rise in the value of money has led investors to favor shares of companies with strong cash flows in the short term. However, in the long term, now is the time to start building a portfolio of stocks of companies focused on a cleaner and smarter future through regular investments.

In today’s rising cost of living, middle-income families find it increasingly difficult to find money to invest, and have to make choices. The smart choice is to get rid of high-interest loans as soon as possible. Then it is worth considering investment options with tax benefits, where it is very difficult to achieve a similar return without taking on additional risks. It is worth exploring investment opportunities when the return on underlying assets is indexed to inflation. Companies that are market leaders in their field and are able, for example, to pass on inflation to the consumer, will also receive the green light.

In conclusion, I will quote Warren Buffett’s point that in times of high inflation, the best investment is the investment in your own specialized knowledge.

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