1. The interest rate will continue to rise. The MCM will provide a return of 2.7%, maybe 3%. The deposits for the year will rise to 3.5%, maybe more. The world of solid investments comes to life. You will get 3.5% or more in short-term shekel bonds of the state, in corporate bonds (of companies) with a high rating you will get a return of 4% plus, maybe 5% in short-term bonds (for several years). This seems to be an excellent period for the solid investor, after 10 years of very low returns in the mega-solid investments, he can get some good percentages, without risk. If he takes even a small-medium risk, the return will of course be higher – risk and opportunity go together. To exceed a 5% return, the investor can buy corporate bonds that are not rated at the top, the return will be really not bad. Only here there seems to be a problem – how do you choose these bonds? Well, you don’t need to understand bonds, there are mutual funds that specialize in investing in bonds of various types. The investment managers in them know the data and the advantages and disadvantages of each bond.
So yes, this seems like a great time for the solid investor, but everything is relative – relative to the past, it’s a great time, but relative to inflation, it’s a bad time. When we received an interest rate of 0.5% per year and inflation was zero, there was a real profit – the return we received yielded more than the index. When we get (probably after the next interest rate update) 3% and maybe 3.5% this will express a negative real return because the index is in the 5% region and there is a fear that it will rise even more. That is, the returns in the solid channels do not achieve the index and provide a negative real return.
What really matters is the real return – the nominal return you get on deposits-MCM-bonds minus inflation. In the past, the real yield was low, even very low, sometimes even negative, but by a small margin. Now that’s a negative return of a few percent.
And there is no solution – a solid investor does not accept government bonds linked to a real yield index, these bonds (for the near term) provide a negative yield of several percent.
In short, you only have a good feeling, this yield is still low and realistically it is lower than ever. When there is turmoil in the markets, when there is economic uncertainty, the first to be hurt are the investors: the state, the banks, the companies, they all price the risks in the markets and come to you with an offer – give the money, receive interest. Even 3%. Seemingly tempting, and given that there are no alternatives, it is really tempting. But it doesn’t even preserve the value of your money.
And what does preserve the value of money?
2. Shares of companies have a real value. They have real assets, they have real activity. So it is expected that they will maintain their value in a period of inflation. The problem is that not all companies are real companies that are based on real activity and real assets, a large part of the companies on the stock exchange is based on financial activity, even real estate companies are ultimately financial companies that hold assets on one side and a huge debt on the other, the bigger the debt manage to generate a higher return on their capital.
Besides, the real companies are not homogenous, there are some that deal in areas with 10% inflation and some in areas with low inflation. It is difficult to understand the effect of inflation on the value of each of them and the whole. In the end, the value of the companies’ activity should increase during a period of inflation, the problem is that on the other hand there are actions that offset it – the debt of the companies increases during such a period and reduces the value of the companies and the uncertainty is great and together with an increase in interest rates and other macroeconomic changes, the risk in the stock market increases and therefore the direction in a period of inflation of shares can actually be downward.
3. The relationship between the solid return and the stock market. There is an inverse correlation between interest in solid investments and stock market returns. The higher the solid interest rate, the lower (and even negative) the return on stocks will be. After all, investors can think with much justice – “Why invest in stocks on the stock exchange, if we get 4% in solid investments without risk?”. This is an important question and the answer is related to membership pricing. Companies are priced on the stock exchange according to the profit multiplier. This is a figure that expresses the market value divided by the profit. The advanced refer to the profit in the coming year and thus produce the future profit multiplier. The profit multiplier indirectly expresses the length of time the investor will receive his money and indirectly the multiplier expresses the return on the investment.
A profit multiplier of 20 expresses a return of 5% (1 divided by 20). This is the whole concept on one foot, growth in profits and other parameters are of course important (value of activity, net financial debt and more), but in general the profit multiplier of the entire market expresses the return of the entire stock market.
when the weighted profit multiplier the representative (we referred to nongap in the dual companies) is 12-14, And this is approximately the profit multiplier of TA 125 (thanks to the banks, ISL and Teva that pull the multiplier down), so the return expressed through it to the stock market is 7%-8% per year. When you compare this return with the solid return, you realize that the shares are still give significantly more, but the higher the solid yield rises, the greater the threat to the stock market, and this is the biggest and real threat to the stock markets. The more the profits of the companies are affected by the macro data – inflation and interest, the weaker the stock market will be. At some point the investors will say – “Enough, I prefer 5% and not stocks.” No one knows when that will happen.
So shares of companies are supposed to keep the money in a period of inflation, but this is only apparent. And what about real estate?
4. Real estate is an enigma. In practice, real estate is supposed to maintain the value of money, after all, it is a real asset. not financial. But real estate has its own rules And if you think that after an almost 30% increase in apartment prices in two years, inflation of 5% a year has importance and influence on real estate prices, you are probably wrong.
That is, real estate over time maintains its real value and even above it, but buying real estate in such a period just to preserve the value of money, may be misleading, because we are in a whirlwind in the real estate market. This whirlwind increases uncertainty and alongside an increase The interest on mortgages and the decrease in disposable income due to inflation, real estate prices are an enigma.
They are a puzzle because although on the one hand one could expect the value of the investment to be maintained, when an investor examines the alternatives and sees the returns on the solid market increase and become interesting, then he can say to himself – “Why do I need an apartment for investment with a return of 2.5%, when on the deposit I will get more A little 3.5%-4%” and then there will be a diversion of funds to the solid instruments. Maybe.
Hence, no matter how you look at it – there is really no device that preserves the value of money. All a solid investor has to do is choose the best alternative for him and close his eyes, hoping that what the people at the Bank of Israel and the economists are telling us is true – inflation is here for another six months and it is automatically going to decrease.