The situation in the world’s stock exchanges has changed significantly, and more changes will be challenging investors in the near future. Inflation is on the rise and is putting more and more pressure on prices around us, for example in consumer products, energy, and raw materials. In the United States, inflation is expected to be around 6.3% in the first quarter of this year, which is really high. For the eurozone, the forecast is more moderate, around 3.5%.
Interest rates have remained very low for years. As a result, interest-rate products have provided few opportunities for the long-term investor. In recent years, the assets of private individuals have been mainly concentrated to equities, almost the only instrument that has consistently provided good returns in the long run. But it is evident that the shares of many companies around the world have long been overvalued. In other words: the values of the shares do not reflect the actual performance of the company.
Central banks’ economic and lending policies have been very mild for years. Even risky companies with poor earnings and balance sheets and bleak future prospects have still been offered cheap loans on the market. This is not in line with the real market situation, and many market analysts strongly believe that the very mild economic policies of central banks will inevitably come to an end this year. The result could be heavy turbulence in the world’s stock exchanges.
Stock Market Outlook
Let’s look at a couple of things that will soon affect stock performance: high inflation and rising interest rates.
There have been many factors behind the rise in inflation last year. The mild economic policies of governments and central banks over the years have further boosted demand while supply has remained low due to the corona pandemic, which has also contributed to the rise of consumer prices. The global shortage of components and the problems of logistics chains, the effects of which are impossible to predict in the short term, have also added inflationary pressure.
The share of inflation in stock prices is twofold. Companies that have a strong brand and wield pricing power over their own products can pass on the increase in product prices to sales prices. Thus, the company’s financial condition improves. But for companies that lack such abilities, the projected returns do not materialize because inflation eats up the real interest rate, and thus the real return to the investor is lower than what the company is able to generate. However, inflation is often a sign of positive economic growth, which means that the economy as a whole is growing. Since many other variables affect any given company’s valuation, assessing the situation for the long term is quite a tricky task.
The Interest Rate Spooky
Rising interest rates from a record long period of low rates will cause plenty of problems to investors in the long run. Companies and governments alike were already heavily indebted when Covid-19 hit the world, and future interest-rate hikes will have a rather negative effect on corporate financing costs. Take, for example, a company’s Price/Earnings Ratio (P/E). If it exceeds 50, we can estimate roughly that a one percentage-point increase will decrease the figure by about 10–15%. Thus, if the company’s financial condition fails to keep its development pace in the future, result warnings and a long-term decline in the value of the share will become imminent. Many financial experts argue that the rise in interest rates will be quite small at first, but given that long-term interest rates have averaged in the 4–7% range, the impact on stock returns will increase as we start from near-zero.
Another long-term consequence of future interest rate hikes around the world is that interest rate products will be increasingly attractive to pension funds, institutions, and investors. If the pace at which holdings are transiting from shares to interest and other less-risky investments accelerates, the result will be a clear negative long-term effect on stock market values.
What Is Your Alternative to Stocks?
Casa Botnia Building Oy recommends investors to diversify their assets and start looking at real estate. While European central banks and the US Federal Reserve keep raising interest rates, especially as economies grow alongside inflation, concerns about real-estate investments are much more relaxed. Rents are typically inflation-linked. Property occupancy rates, as well as rental levels, will increase in this market situation. After all, inflation also raises construction costs, which limits new construction to some extent and brings more funds to the real-estate investor’s own bag, provided that the investors have started moving their assets over to real estate in good time. Rising rental income thus provides protection against rising interest expenses and yield requirements.
By mid-2022, Spanish analysts are expecting real-estate prices to rise by an average of 4%. Price increases are expected to be higher on the Mediterranean coasts and in resorts.
Why Invest in Spain?
Tourist flows and the aging of Europe’s population and its transition to warmer countries are fairly independent of market fluctuations. These trends are well established and ongoing. Spain is one of the top countries in Europe as a holiday destination for retirees. The year-round occupancy rates of housing here are high compared to many other European countries. The sunny subtropical climate keeps attracting people from the northern European countries to Spain’s coasts. The already business-as-usual working from home also favors Spain, where the telecommunications infrastructure boasts a high level by international standards.
Real-estate transactions in Spain in 2021 rose to pre-Covid levels and even above. In the past 12 months, 530,000 home sales were made in Spain, the highest number since 2008, i.e. before the global banking crisis. Property prices rose, especially in apartment buildings, but an increase could also been seen in detached houses. The increase in home sales in the previous year in our region, the Autonomous Community of Valencia, was 30.6%.
The Bank of Spain stated that properties with an average annual rental yield of 7% are a competitive alternative to any investment, given the changes in the market mentioned above. In general, there is a shortage of rental properties in Spanish coastal resorts – a very good argument for a real estate investor looking for a solid rental income and maximized occupancy.
By mid-2022, Spanish analysts are expecting real-estate prices to rise by an average of 4%. Price increases are expected to be higher on the Mediterranean coasts and in resorts. So here is a profitable option for every investor, even in the long run!
We welcome you to explore our destinations and discuss your investment plans with us!