In 2023, almost all investments were successful. The highest appreciation came from shares (around 20%). Above-average returns were also recorded by bond funds (8-10%). Apartment prices fell, but most real estate funds reported returns of around 5-8% thanks to rents. The price of gold rose by 13% and Bitcoin by 155%. Last year, it was basically impossible to step aside, with the exception of China or commodity funds.
Inflation on the decline, interest rates will fall
The year-on-year inflation rate fell to 6.88%, with the consumer price index already rising over the past 11 months by just 0.82%. The time is coming for the CNB to lower interest rates. Interest on savings accounts will decrease. As well as returns of deposit funds or anti-inflation bonds. Anyone who wants to evaluate the savings will have to invest.
In January, the year-on-year inflation rate will drop significantly. Central banks are expected to gradually cut interest rates through 2024. Such the environment should be especially favorable for bond funds, real estate funds and private equity funds. Stocks could also do well, but that is uncertain. I see the main risks now mainly in the further escalation of geopolitical tensions (the threat of a blockade of Taiwan, the threat of a war in the Persian Gulf, etc.)
Inflation and interest rates in the Czech Republic in the years 2007–2023
Author: FINEZ Investment Management, sro
Stocks back on top
In 2023, stocks did very well, virtually everywhere in the world and across all sectors. The values of the leading stock indices climbed to the same level as at their highs from the end of 2021. The value of the global stock index MSCI World rose by 17.6% (in euros) in the past year.
Table: Development on stock markets in 2023
Development on the stock markets in 2023 MSCI World (in EUR) 18% S&P 500 (in USD) 24% MSCI Europe (in EUR) 13% MSCI China (in EUR) −16% PX (in CZK) 18%
American technology companies in particular did extremely well above average (Apple +48%, Microsoft +57%, Alphabet +58%, Amazon +81%, Meta Platforms +194%, NVIDIA +239%). Also in Japan and Taiwan, stock prices rose by an average of 26%. Shares in Poland also brought a great appreciation of 30%. In China, by contrast, stock prices fell by an average of 16% last year. In the Czech Republic, share prices rose by 18% on average.
Expectations for 2024 are very mixed for stocks. Stock values primarily depend on the profitability of companies. It is difficult to estimate what the year 2024 will bring. We can only say that in the long term, companies’ sales and profits will increase with inflation. Equity markets have room for further growth. On the other hand, compared to bond interest, stocks aren’t cheap today, with the average gross dividend yield for US S&P 500 stocks just 1.5%.
Development of the value of the S&P 500 index and the profitability of companies in the years 1990–2023.
Author: FINEZ Investment Management, sro
Golden times for bonds
In 2022-2023, central banks around the world raised interest rates significantly in response to high inflation. This was very negative for older bonds bearing low interest. At the same time, it was after for many years it is possible to purchase bonds with interesting interest income and thus fix high interest rates for several years. Now the interest on bonds has already started to fall, as inflation is already on the decline and interest rates should go down.
Development of the yield to maturity of ten-year government bonds of the Czech Republic.
Author: FINEZ Investment Management, sro
The yield to maturity of ten-year Czech government bonds rose to 6% pa in 2022, but by the end of last year it had already fallen below 4% pa Similarly, in the USA, the yield to maturity of ten-year bonds fell from 5% pa to 4% pa in the last three months and in Germany from 3% pa to 2% pa
Table: Yield to maturity of 10-year government bonds
Yield to maturity of 10-year government bonds Germany 2.0% USA 3.9% Czech Republic 3.7%
Funds are now benefiting from falling interest yields on bonds. In the past year, bond funds on average brought appreciation of around 8-10%. Riskier high yield bond funds or bond funds focused on emerging markets even had returns of over 10%.
It is expected that during 2024, central banks will gradually reduce interest rates. The Czech National Bank already reduced the repo rate from 7% to 6.75% in December. Interest rates on bonds with longer maturities have been falling for some time, and now interest rates on bonds with shorter maturities will also fall. As interest rates on new bonds fall, the price of older bonds bearing higher interest rises.
Investors have now in bond funds, a unique opportunity to collect quite high interest, and also to earn from the growth of bond prices. The year 2024 should therefore be very positive for bond funds. Riskier high-yield bonds have the greatest income potential, where the yield to maturity is still around 8% pa
Apartment prices fell, but only slightly
According to the Czech Statistical Office, apartment prices in the Czech Republic (realized prices) fell by an average of 6% in the first three quarters. Figures for the fourth quarter have not yet been released, but according to signals from real estate agencies, buyers are already returning to the market and prices have stopped falling. The prices of older and less energy-efficient apartments fell the most, often by as much as 30%. On the contrary, the offer prices of new buildings from developers fell by only 4% on average.
Table: Development of apartment prices in 2023 (as of 30 September)
Development of apartment prices in 2023 (as of 30 September) Prague −5.6% Czech Republic without Prague 6.1% Whole Czech Republic −6.0%
Two years ago, I expected a significantly larger drop in apartment prices. But then the war in Ukraine started and half a million people who needed somewhere to live came to us. All the empty rental apartments were filled. Although the market lacked buyers for the last two years, there weren’t many sellers either. If it weren’t for the Ukrainians, the market would be flooded with empty rental apartments and prices would drop by 20-30%.
Thanks to falling mortgage rates and pent-up demand from the past two years I expect a significant revival of the real estate market in 2024. Apartment prices have probably already bottomed out and will slowly start to rise again. However, we believe mortgage rates will remain elevated somewhere around 4-5% pa for the long-term, so only serious buyers, not speculators, will return to the market. This should keep housing price growth in check.
Development of realized apartment prices in the Czech Republic in the years 2005–2023.
Author: FINEZ Investment Management, sro
Real estate funds withstood the pressure
In 2023, real estate funds focused on residential and commercial real estate struggled with rising yields and rising interest on loans. Yet thanks to rising rents, real estate funds were able to report solid appreciation of around 5-8% in most cases.
The year 2024 should be very favorable for real estate funds. And the following years as well. In the past two years, due to high inflation, rents for real estate funds jumped significantly on the income side, but at the same time on the expense side, interest on loans. While interest rates should gradually decrease, rents will already remain elevated.
Operating profits will therefore increase, and this will have a positive impact on the accounting valuation of managed properties, which will be catching up with inflation for a few years now. The perspective of real estate funds for the coming years is therefore very good and they should now stably beat inflation for several years.
The koruna weakened slightly against the euro and strengthened against the dollar
With the expectation of a drop in interest rates in the Czech Republic, the koruna began to weaken against the euro since the summer, as the European Central Bank, on the other hand, continued to raise interest rates in the summer. The interest differential between the crown and the euro gradually decreased during the year and the koruna ceased to be so attractive to investors. As long as koruna deposits (and bonds) bore 6% per year and euros essentially no interest, the koruna was in high demand in Europe.
Table: Selected exchange rates in 2023
Selected exchange rates in 2023 EUR/CZK 24.70 2.50% USD/CZK 22.40 -1.10% GBP/CZK 28.50 4.60%
The further development of the Czech currency against the euro will largely depend on how synchronized the central banks will reduce interest rates. If the CNB lowers rates before the ECB, the interest differential will continue to decrease and the koruna may continue to weaken above 25 crowns per euro. However, if the ECB soon also starts to reduce rates and koruna deposits retain higher interest rates than euro deposits, the koruna has the potential to strengthen again below 24 crowns per euro.
Development of the EUR/CZK exchange rate.
Author: FINEZ Investment Management, sro
Energy is sharply cheaper
Most of the commodities on the stock exchange fell significantly in price last year. The price of oil fell by 8.5%. Thanks to this, fuel at gas stations also became cheaper. But especially the price of electricity and gas on the stock exchange fell significantly Power Exchange Central Europe. Thanks to cheaper energy and fuels, inflation is also falling.
Table: Development of commodity prices in 2023
Table: Development of commodity prices in 2023 Gold (USD/Oz) 2063 13% WTI oil (USD/b) 72 −8% Electricity (EUR/MWh) 98 −55%
Unfortunately, the cheaper the energy itself is, the more the price for distribution and fees for RES have increased since January, so in the end we will not see a discount on the invoices. However, the positive is that Europe was able to break away from dependence on Russian resources and the energy crisis now seems to be averted unless something else extraordinary happens to threaten the supply of oil and gas to Europe again (eg Gulf War etc.)
Electricity price development (EUR/MWh).
Author: FINEZ Investment Management, sro
Both gold and bitcoin have fallen significantly in price
The price of Bitcoin soared past $40,000 in December, and for the entire year 2023, the price of Bitcoin rose by 155%. The price of bitcoin rose mainly in anticipation of the approval of the first bitcoin ETFs on the US market. The price is also supported by the planned halving, which should occur this April.
Table: Price development of precious metals and cryptocurrencies in 2023
Precious Metals and Cryptocurrency Price Development in 2023 Gold (USD/Oz) 2063 13% Silver (USD/Oz 23.78 −1% Bitcoin (USD/BTC) 42,265,155%
Gold price rises 13% in 2023 due to inflation and geopolitical tensions to a new high. In December, it even briefly rose above $2,100 per ounce. On the contrary, the price of silver fell by 6% in December, and by the end of the year it was roughly at the same level as a year ago.
Gold price (USD/Oz)
Author: FINEZ Investment Management, sro
Land, private equity and other FKI
I expect above-average appreciation for 2023 from funds focused on agricultural land, renewable energy sources, receivables, loans and also from some private equity funds. On the contrary, many real estate and development funds will certainly report weaker economic results.
However, we still know incomplete results for most FKI funds in 10-11 months or three quarters of last year. The award as of 12/31 will be published only after the audits, i.e. usually in March/April. A specialized portal displays an overview and results of variously focused FKI funds in the Czech Republic FKI-fondy.cz.
I see for 2024 interesting potential for private equity funds. Here, similarly to real estate funds, a drop in interest rates will have a positive effect on valuations, both thanks to cheaper loans, but also within the valuation models themselves when discounting future cash flow.
Disclaimer: The article and the information contained therein are not an investment recommendation or an analysis of investment opportunities, nor do they constitute a public offer of investment instruments or any other offer or invitation to the public to transact with investment instruments. The data given in the article comes from FINEZ Investment Management materials and is valid as of 12/31/2023, unless otherwise stated.
2024-01-16 09:14:55
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