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General Investments: Progress in Russia-Ukraine Diplomatic Talks, Slightly Lower Energy Prices Contribute to Optimism

General Investments portfolio managers have compiled a summary of current developments affecting the capital market and current investor advice.

Overview of current developments:

Last week we witnessed a sharp decline in the value of the most monitored stock indexes on world stock exchanges, which accounted for a significant part of this year’s decline in just a few days. The US S&P 500 rose slightly less than 8 percent from Tuesday, when it was at the local bottom, until the end of the week, marking the most profitable week since November 2020. European stock markets behaved similarly, and the Chinese stock market was even more dynamic. The growth is based on the slightly higher chances of reaching an agreement between Russia and Ukraine, the outcome of the Fed meeting and the fact that Russia managed to repay $ 117 million in interest on its debt, thus avoiding insolvency or bankruptcy.

Last Wednesday, after a two-day meeting, Fed Governor Jerome Powell announced the first increase in the key US interest rate since 2018. The Fed decided to raise 0.25% as expected, taking the first step towards normalizing monetary policy. Fed officials predict that the key interest rate at the end of next year ‘s tightening cycle will be 2.80%, which would have a significant impact on both the financial markets and the economy as a whole after a long period of zero interest rates. By raising the central bank interest rate, they increase borrowing costs and thus slow down economic activity in the event of overheating of the economy, thus reducing inflationary pressures. Interest rates also affect the valuation of shares, as they are the basis for determining the rates at which the company’s future cash flows are discounted. Theoretically, higher interest rates should have a negative impact on the stock market due to higher discount rates and borrowing costs, but in practice, past data show the opposite. According to a study by German investment bank Deutsche Bank, the average return on the S&P 500 in the first year after the start of the US interest rate cycle was 7.7%.

The yields of the main European indices were also significant. The indexes of the German, Italian and French stock exchanges last week increased by over 5%. Advances in diplomatic negotiations between Russia and Ukraine and slightly lower energy prices have contributed to market optimism. The EU summit is increasingly talking about issuing joint bonds that would be intended primarily to finance investments in the field of energy and defense. Frugal member states, such as Germany and the Netherlands, are more reluctant to embrace the idea, as common Eurobonds, on the one hand, make borrowing more favorable for countries with less sound public finances, but on the other carry a common guarantee for all countries and mutual sharing. at risk. The main European challenge for 2022 remains the response to war and the threat of recession. ECB analysts do not expect a recession for some investment banks, but all opinions have a lot of “checks”, because the situation is complex and above all unpredictable. Pressure is mounting to ban all trade with Russia (meaning both oil and gas), which is strongly opposed by Germany in particular, but apparently a complete blockade remains only a matter of time.

Chinese stocks have finally recovered slightly amid a combination of recent negative news and fears of a pullback from US stock markets over the past week. Greater optimism was raised by representatives of the Chinese Communist Party, whose policies were to ensure stability in the capital market, assist the wounded real estate sector, and resolve regulatory issues for technology companies. Official Beijing has also expressed willingness to compromise on Chinese companies listed on the US stock exchange, which are facing withdrawal due to non-compliance with US auditing standards. Government bonds resumed trading on the Russian stock exchange this week, and stock trading has been suspended for almost a month. The required yield on Russia’s 10-year government bond fell from 20% to about 14% after Russia managed to repay interest on its dollar-denominated debt.


The geopolitical situation remains highly unpredictable, but the Fed is still raising interest rates and the market has grown. The complex situation and investing in such an environment can be very uncertain in the short term. Further growth in US interest rates is inevitable, mainly due to rising inflation. The question remains what the ECB will do in the face of rising inflation. War and related disruptions in logistics chains, as well as high energy and raw material prices, have led to a recession, with central banks having much less room for maneuver than in the past. Energy and raw material prices continue to rise. On the other hand, the yields of the banks remain negative, and the yield offered by the bonds is almost 0.

Inflation, however, irresistibly swallows both bank deposits and bond investments. A defensive approach and a diversified portfolio are key to protecting savings in this situation. Therefore, globally diversified capital investments with a combination of bond investments remain the most attractive choice, as capital investments offer some protection against inflation, and the tasks of bonds are to reduce portfolio risk. The emphasis is on developed markets, where the correction in recent weeks has increased the attractiveness of stocks, but it is not yet time for larger investments in the market, the investment needs to be made in several steps. Despite the adjustment, technology stocks remain an interesting choice for long-term investors, as they offer business growth and follow-up of future trends. Attention is currently focused on materials and energy, where the shares of companies in the industry are only slowly following the growth of the raw materials themselves, so this industry still hides significant reserves. The story of the supply industry is complex because of its reliance on Russian energy sources, especially gas, but there are still opportunities. Financial stocks have become unattractive due to higher inflation and lower expectations of rising interest rates. First of all, let’s persevere with scheduled payments, because history teaches us that this is by far the best approach to maximizing savings. Investing in difficult, challenging times has proven to be above average in most cases over a period of five years or more.

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