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Financial Market Commentary – October 2017


  • Japan: prime minister Shinzo Abe wins constitutional majority in election
  • Czech Republic: elections won by ANO movement; inflation accelerates


Major stock indices gained strongly in October. Both US equities, which are benefiting from the expected tax reform prepared by President Trump, and European equities, which are being pulled up by the improving performance of the European economies, did well. The only wrinkle for investors in European equities is now Catalonia, which is seeking independence from Spain.

Among the major stock indices, the Japanese market has been the best performer. The incumbent Prime Minister, Shinzo Abe, won a clear victory in the elections, winning 2/3 of the seats and thus having a constitutional majority. The election result means a green light for the continuation of his reforms, which seek to boost the long stagnant economy by weakening the yen. This benefits Japanese companies, which are strongly pro-export oriented, and this in turn drives up Japanese stocks.

In the domestic parliamentary elections, the ANO movement won a landslide victory with almost 30% of the vote. A record 9 parties entered parliament, but most of them refused to cooperate with the ANO movement, led by Andrej Babiš. The prime minister nominated by the president will therefore probably have a hard time gaining support for his government.

The Czech economy is doing very well this year, with GDP growing by +4.7% yoy in Q2. However, low unemployment and low interest rates are putting upward pressure on prices, with consumer inflation already accelerating to +2.2% yoy. This is of course dangerous for the traditionally thrifty middle class who use savings accounts.

Investor School:

Accelerating inflation always hits the middle class the hardest. While the wealthy invest in real assets such as stocks, real estate or even gold, the middle class mostly saves using banking instruments, be it savings accounts or fixed deposits. These have their place in a portfolio, but only to build up a short-term reserve. However, they are very disadvantageous for long-term savings because they cannot beat inflation over long time series and there is still a 15% withholding tax on interest.

In the economic growth phase, inflation usually accelerates and starts to significantly beat conventional savings instruments (e.g. the much used ING Konto). In such a situation, financial assets lose their real value – bank clients lose money in real terms. As mentioned above, this is not a problem with short-term reserves, which are not intended to appreciate in value but rather to reduce risks in case of sudden expenses or short-term income shortfalls. But it is a problem for funds built up beyond the financial reserve, which the client will want to consume after a long time. Rather than letting funds sit idle and lose out to inflation, it is better to invest them in real assets that are protected from inflation over the long term. Because remember, there is an unlimited amount of money, but a limited number of real assets. There is only a finite amount of successful companies (stocks, shares in companies), real estate and also only a finite amount of gold. So the intelligent investor does not keep track of how much money he has, but how many real assets he has!

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