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Andrei Kochetkov: In the shadow of inflation. How To Save Money And Make Money

Rising inflation and an unstable political situation are now making anyone who has made more or less financial savings ask where to invest so that money does not lose value. The yields of traditional investment instruments – stocks, bonds, investment funds, bank deposits, etc. – are declining. What is the situation and is it possible not only to keep the value of money, but also to make money?

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The latest global forecasts for a possible slowdown in economic growth and rising inflation today call for special caution about investment opportunities. The World Bank has recently reduced global economic growth from 4.1% to 3.2%. The International Monetary Fund (IMF) also expects the world economy to grow by only 3.6% this year and next. In the Eurozone, on the other hand, the average inflation, according to the IMF forecasts, will reach 5.3% this year, but for Latvia it is forecast to be unprecedentedly high – 10%, while economic growth – 1%.

These figures mean one thing – without doing anything, during the year any savings in Latvia will lose 10% or, in a worse economic development scenario, even more of the value.

Looking forward to the EU government and European Central Bank proactive action to curb inflation, it should be borne in mind that it is likely to continue to rise for some time to come.

Gold, real estate or stocks?

The answer to the frequently asked question of whether it is worth investing in gold, which is a lifelong and traditional lifeline in financial crises, will be sad. Gold prices are currently relatively high, and the right time to buy it for profit is in the past. It should be remembered that if you buy an ounce of gold and hope that inflation will continue, the investor will have only one ounce of gold at his disposal in 10-20 years. This precious metal does not generate income, but allows you to keep the value of money by covering inflation or a little more.

Also often referred to as investment in real estate is the area where returns should be viewed with caution. Real estate is not cheap, its management and maintenance requires a lot of time and money. The expected return is 2-8%, moreover, the more expensive the property, the lower the profit. Managing yourself means working full time, but hiring a manager will eat up most of the profits.

One of the best-known profit instruments, the stock markets, have also experienced extreme instability and volatility in recent months due to Russia’s war in Ukraine. If the historical yield, for example, was 7-8% in USD, now there is a general downward trend. For example, the well-known US broad market index S&P 500, which is the index of the largest companies, fell by 7.8% by the end of April this year. In Europe, the decline was even greater, for example, the German stock market index DAX fell by 8.7%. This shows that investing in the capital markets is quite complex and you need to be a professional in the field to understand and find the opportunity to earn.

Another known, safer, but therefore less profitable option is to invest in fixed income instruments – bonds. Given that central bank interest rates have been at record lows or even negative for a long time in the EU, this type of investment has also declined in recent years and is preventing effective inflation from being tackled effectively.

Subordinated bonds – a new opportunity in the market

One of the relatively less used investment instruments in the Latvian market is subordinated bonds, which allow for a yield of up to 5-7% for a term of 7-10 years. Potential investors in this instrument are not only banks, investment funds, insurance companies, but also private investors with experience and, most likely, an already established investment portfolio.

The purchase of subordinated bonds is offered by all major European banks, while in Latvia only a few banks, moreover, such an offer is more often not public for domestic banks. Thus, in Latvia last year the public bond offer was organized by the bank Citadele, now BluOr Bank is among the few banks that think about the bond offer to customers, and from 16 to 27 May it will issue subordinated bonds in the public offer. They are scheduled to be listed on the NASDAQ Riga Baltic Debt Securities List. Immediately after the start of trading, Nasdaq Riga subordinated bonds will be freely available for purchase and sale on the regulated market.

Proceeds from the issuance of subordinated bonds are usually used to increase the bank’s capital, which allows for better development of banking services – to promote lending, attract deposits and strengthen market positions, promoting national economic growth and strengthening local businesses.

It should be reminded that in Latvia the banking system is still accused of prolonged weak lending, which does not promote economic growth. Banks still have a relatively large amount of free capital, so there has been no need to raise funds through subordinated bonds, which is a relatively expensive instrument. It is different for banks that implement a more aggressive lending policy in the Latvian market, for which raising funds is a precondition for growth.

Transparency of banking as an important factor

It must be borne in mind that the era of low rates and the availability of cheap money in Europe and Latvia is coming to an end. Banking services, including loans, will become more expensive and competition from banks for corporate lending will intensify. Banks that have raised funding, including through subordinated bonds, will be able to offer loans at lower rates and benefit from competition. On the other hand, buyers of subordinated bonds can expect to get a high fixed return when investing money, which will exceed the expected inflation of 3-4% in the coming years. When it comes to risks and comparing types of investment, it should be noted that a deposit is a lower risk investment, but investing in subordinated bonds yields significantly higher returns.

With regard to the security of the new investment, it should be emphasized that banks in Europe and also in Latvia are one of the most closely monitored businesses, which must meet the very strict requirements of the ECB and domestic central banks and financial supervisors. The regulation of capital adequacy calculation and requirements in Europe has become stricter, with increased regulation not only of anti-money laundering but also of increased capital adequacy, liquidity and other requirements. Additional credibility is also provided by the fact that subordinated bonds are issued on the Nasdaq Baltic stock exchange – in order to take this step and secure a public issue of bonds, the bank must meet a large number of requirements that only stable financial institutions can afford. By purchasing subordinated bonds, the client gains freedom – the money is handled by an issuer who provides regular detailed reports on the return on money, but the bond issue itself is a process that is as transparent and transparent as possible.

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