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Investing in the face of Inflation – Why everyone has to act now!

In June 2022, inflation in Germany was rated at +7.6 % compared to the same month last year, and in the European Union even at +8.6 %. These are the highest values for decades. For the year 2022, the German Central Bank forecasts inflation of +6.9 %. Bearing in mind that there is no interest on savings or (above certain amounts, depending on the financial institution) even negative interest, it is crystal clear that investors should anticipate a real interest rate of around -7 %.

Source: www.inflationsrate.com (adapted)

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An experienced asset manager can provide much helpful advice in this respect.

116 billion melt like snow in the sun! Every year!

Only the loss in purchasing power is guaranteed … If you leave the money in your current or savings account, you incur an actual loss of purchasing power of about 4 % per year. This is the highest rate in the post-war period, i.e., in the last 75 years. The Federal Statistical Office calculated in June 2021 that around 2.9 trillion (in figures: 2,900,000,000,000) euros are parked as cash or savings deposits in Germany. This means a loss of 203 billion euros of purchasing power per year just for cash and savings deposits. An incredible sum!

Source: Deutsche Bundesbank

But the whole thing doesn't have to be. What alternatives are there for investors in times of inflation?

Protection against inflation: Only tangible assets still offer opportunities.
Against this background, asset accumulation or asset investment worthy of the name is only possible if savers are prepared to take risks when investing their money. With an investment in tangible assets, the investor aims at a long-term increase in value but accepts price fluctuations along the way. Tangible assets stand for real property in contrast to traditional interest-bearing investments. Tangible assets can be, for example, real estate, precious metals, works of art, vintage cars, wine, but also equities since they certify an ownership share in a company. In any case, tangible assets represent something “material”.

Source: www.renditeresidenz.de

Unfortunately, the prices of tangible assets cannot be predicted. Only after the sale of the asset does anyone know whether it was a worthwhile investment or not. This uncertainty deters many savers and investors from investing in shares. Many remember the disaster of the Telekom shares and the New Market after 2000. But also with real estate, it is unclear how the value will develop in the next ten or twenty years. The value of real estate also depends strongly on the interest rate level. Real estate prices have skyrocketed in recent years due to exceedingly low-interest rates. However, with the reversal in interest rates, real estate prices will come under increasing pressure. That is why real estate is usually not a safe haven in times of inflation.
Although the ECB has not yet raised interest rates (as of 12 July 2022), interest rates on the mortgage market are already significantly higher than they were 12 months ago. Unrest is spreading in the real estate sector.

Why stocks can be a good investment in the face of inflation

Pricing power is the key.
Stocks as tangible assets are ownership stakes in a company. Companies with good and competitive business models can pass on price increases in raw materials and intermediate products to consumers. Especially if the companies have built strong brands and these are in demand by a loyal clientele. Well-known examples include Apple, Microsoft, and Amazon.

Times of high inflation are usually good times for market leaders, who often have higher “pricing power” than second or third-tier suppliers with many competitors. This also applies to suppliers of those raw or basic materials, which are complicated to produce and therefore in short supply. But also producers of consumer goods such as Procter & Gamble or Unilever, whose products are in broad demand and difficult to replace. Hardly anyone can do without food, toilet paper and cleaning products even if prices rise.

Dividends as a buffer against inflation

Classic dividend stocks also provide such a buffer against inflation. Companies like these offer shareholders an attractive pay-out even in economically uncertain times and thus play to their strengths. One of these is called constancy. The dividend ensures that possible price and inflation-related purchasing power losses are cushioned (in part). Finally, the decisive factor when investing in shares is the quality of the company: Companies that are broadly diversified with a wide range of products in the market and make good profits every year remain good businesses, even if the share price falls in the short term or a quarterly result does not quite meet expectations.

The dividend aristocrats

Some companies manage to use their capital so efficiently that they have been paying shareholders a dividend every year without interruption for over a hundred years. One company in this illustrious club is the US consumer goods group Colgate-Palmolive, which has paid a dividend without interruption since 1895. Other companies have even managed not only to pay a dividend continuously for decades but also to raise it year after year. Among the companies that have been able to increase their dividends for more than fifty years in a row are, in addition to Colgate-Palmolive, the beverage producer Coca-Cola or the pharmaceutical and consumer goods group Johnson & Johnson. These are the so-called dividend aristocrats. With such stocks, it has been possible to successfully defy any inflation in the past.

In times of rising inflation, Genève Invest purchases stocks of companies with excellent business models in a targeted manner for client portfolios.

Genève Invest also consistently applies the arguments presented here in the compilation of its clients’ portfolios and, in times of rising inflation, invests in shares of companies with excellent business models. Companies that have succeeded in erecting high barriers to market entry and have secured a market leadership position. These companies are always able to pass on higher costs to the consumer and thus continue to increase profits even in times of inflation. In the medium and long term, this capability is also rewarded on the stock market.

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