Crisis countries Türkiye and Argentina: Stocks protect against inflation, even with 140 percent inflation
High inflation figures distort perception: Even if the economy is stagnating in real terms, companies can still increase their profits. Because inflation arises from the pricing power of companies. Stocks therefore offer the best protection against loss of purchasing power.
The change in gross domestic product (GDP) is always stated in real terms, i.e. adjusted for prices. Companies calculate in nominal sizes. Let us assume that inflation roughly corresponds to the increase in revenue and costs for all companies and economic participants in a country. Revenues and costs both increase by eight percent, for example. In purely mathematical terms, this also results in an increase in profits of eight percent.
For national accounting, however, this simply means price-adjusted growth in economic output of zero, even though companies generate eight percent more sales and therefore earn more. Even if sales are falling, this does not mean that sales are also falling. This is how companies like… PepsiCo raise their prices by 14 percent in the first nine months of 2023, although sales of goods fell by three percent. This results in an increase in sales of at least eleven percent.
The crisis countries Argentina and Turkey impressively show why productive capital can provide good protection against inflation. In Argentina the key interest rate is 133 percent and in Turkey it is 40 percent, well below the annual rate of 138.3 percent and 61.4 percent respectively. The interest rate market in these countries was unable to compensate for inflation. In highly inflationary countries, savers try to protect themselves from currency devaluation with stock investments, gold and hard currencies. In hyperinflationary countries such as Turkey and Argentina, people take refuge in the local stock market. The Argentine stock market index MERVAL was able to increase by 355 percent in the past twelve months, Turkish shares (ISE index 100) rose by 73 percent (in local currency) – significantly more than the price increase absorbed.
Stock baskets from stable economies provide the best long-term protection against inflation. The above markets carry high risks, we prefer more established markets. Attention must be paid to sufficient regional and industry diversification, the quality of the business models and evaluation.
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2023-12-17 12:16:13
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