How to invest during high inflation?

The current inflation and the looming economic recession are adversely affecting the attractiveness and performance of the assets in which investors invest their funds. Read on to find out which direction to take and which to avoid during high inflation, what the forecasts are and why it is not worth leaving your money in the bank.
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The global economy is slowing down

The global economy is growing at a slower pace than economists expected. The main causes are Covid, the war in Ukraine and rising interest rates. There is also a risk of an economic recession soon, which may gradually turn into an energy and inflation crisis.

The International Monetary Fund (IMF) has downgraded its global economic growth outlook for 2023. Gross Domestic Product (GDP) is expected to increase by only 2.7 per cent from the original July outlook of 2.9 per cent. The downgrade also affects the Czech economy.

The Organisation for Economic Co-operation and Development (OECD) expects euro area growth to slow. It is expected to fall to 0.3 per cent next year from 3.1 per cent this year. The OECD also warns that further energy supply disruptions will increase inflation in Europe. The forecasts are very unfavourable in neighbouring Germany, which is dependent on Russian gas. According to the OECD, there will be a decline of 0.7 percent, while it expected growth of 1.7 percent in June 2022.

The United States is less dependent on energy imports than European countries, but it is still in decline. The US base rate has reached its highest level since before the financial crisis in 2008.

The last time the Federal Reserve (Fed) took such a strict approach to monetary policy was in the early 1980s.

US economist Nouriel Roubini expects a long recession towards the end of 2022, which he says could persist in the US and globally throughout 2023.

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Inflation in the Czech Republic rose to 18 percent

Unfortunately, the economic crisis is not avoiding the Czech Republic either. In September 2022, the price level rose by 18% year-on-year and inflation accelerated compared to August.

This is the highest annual inflation rate since December 1993.

According to the Czech Statistical Office, consumer prices also rose month-on-month by 0.8 percent.

Energy should not go unnoticed either.

• Natural gas prices increased by more than 15 percent compared to August 2022
• Electricity price increased by 3.6 percent
• Apartment rents up 5.2 percent
• There were also increases in water, sewerage and hot water charges

The rising cost of a "roof over your head" logically affects housing affordability and the entire real estate market, which has cooled down in the last 6 months. However, despite only a slight decline in housing prices, the Czech Republic ranks among the countries with the worst housing affordability in the world. The monthly mortgage payment for a 2-bedroom apartment is practically equal to the average net wage in Prague, which is a rather drastic ratio.
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How to invest in times of inflation?

The high inflation rate and record price rises are taking a toll on all those who hold funds in current or savings accounts. Even the best savings accounts are unable to cover inflation (in September 2022, Trinity Bank offered a best rate of 5.58% per annum for deposits up to CZK 400,000). The same is true of time deposits.

The economic situation makes it difficult to decide between different investment plans, which is why it is necessary to take a more sophisticated approach than depositing money in a bank account.

The goal of every investor at the moment should be to diversify their portfolio and seek out professional investment partners with transparent (and of course good) track records.

Conversely, it is worth avoiding assets with high volatility such as cryptocurrencies, but also many stock titles or mutual funds.

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For example, the S&P 500, a stock index comprising shares of the 500 largest publicly traded companies in the U.S., hit its lowest level of 2022 at the end of September due to the global equity selloff. According to Barry Bannister, an analyst at Stifel, there are several catalysts that could propel the S&P 500 index 19% higher in the first quarter of 2023 from current levels. Bonds are also undergoing a dramatic decline due to the aforementioned rise in interest rates. If you don't want to face market volatility, choose stability and fixed interest.

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What are more stable investments

Investing in real estate should be part of the portfolio diversification of any investor who prefers consistent long-term returns and looks for gains over a longer time horizon.

The outlook for real estate remains positive even in today's economically complicated times, unlike other assets.

The good news is that the decline in the mortgage market is not making building land cheaper at the same time. According to the Mortgage Bank's index, they were 24% more expensive in the second quarter than in the same period last year. For flats, it is 21% and for houses 20%.

The above are practical pointers for anyone deciding how to handle finances in times of crisis. The way forward is to allocate spare funds to more stable investments, which include real estate. These offer stability and low volatility and, in the case of group investment, have a clearly fixed interest rate.

Investing "conservatively", i.e. in real estate, is certainly prudent in times of uncertainty. The real estate market has long been one of the most stable and profitable ways to invest.

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Sources: CNB, OECD, iDnes.cz, IMF