Investigation: Farouk Fayyad
There are major players in the “chess” challenge between inflation and interest rates. Whoever has patience and intelligence will emerge victorious at the end of the road, even if he suffers collateral losses that only increase his solidity towards a new stage of survival. How have corporate investments been affected as a result of this eternal challenge in this white patch? And the black that has no third color.
Inflation rises to record levels, so that the US Federal Reserve begins to raise interest rates successively, and central banks whose local currencies are pegged to the US dollar (the UAE, for example) follow up to raise interest rates with every action taken by the Federal Reserve and change with all these cycles, the general form Corporate investments and future directions.
Digital and technological investments are two huge “castles” that protect them from the king, and there is nothing better than the company’s assets, strength, and survival in the profitability category to represent the “king” in this chess challenge, while stocks and bonds are the most volatile and affected as a result of the two-chess challenge.
(Inflation and interest rates) They represent the “pawns” that companies can sacrifice in order to come up with the lowest costs and losses as a result of the challenge, and they do not reflect the companies’ cash liquidity and deposits with banks. Except as a winning Trojan horse in this race and in the final “checkmate” round.
Experts and analysts in the financial and insurance sector confirmed that high interest rates and high levels of inflation at the global level will create more pressure on corporate investments, especially stocks and bonds, while deposits constitute a safe haven in such circumstances.
They explained that as a result of such global challenges (inflation, high interest, global economic recession), companies will reduce their operating expenses, and in many cases they may have to stop operations and employment, and always strive to get rid of their goods and supply their products in the markets to achieve financial returns in any way. As these companies began to think seriously about achieving investments with more profitable economic returns, such as companies resorting to options to buy back their shares and resell them in the stages of recovery and economic growth, seeking to raise the value of the share.
High stakes
Financial analyst Muhammad Ali Yassin said: The impact of inflation and high interest rates on sectors differs from one company to another and the nature of its investments, as inflation is a natural result of increased consumer spending, and therefore the interest rate is raised to raise the expenses of the investor, who strives to reduce his consumption spending.
Yassin added: «There are concerns about companies as a result of rising inflation, such as reducing their consumer spending. Factories producing clothes and shoes, for example, will have to rid their goods and warehouses of these stacked products to reduce expenses. And what we have seen in the United States of America in terms of raising interest rates to curb the effects of inflation will lead to stopping new hiring operations in American companies, and even laying off 10-20% of their workforce as a preemptive measure for any economic slowdown.
Yassin indicated that raising interest will lead to an increase in spending, and therefore; The investment amounts available in stocks, bonds, etc., their investment appetite will become less, since the surplus profits from these tools will inevitably decrease. The interest rate on US Treasury bonds ranges between 3.3-3.5% and is expected to rise by 75 basis points. The percentage of zero risks lies in deposits and investments with banks, where investors await the options that the bank gives them at such times, and they may be in the form of bonds or deposits, so it is better that they be with high and long returns and margins. Yassin explained, saying: “The rise in interest will put a lot of pressure on the returns or rents of stocks, so it is no longer feasible for stocks to achieve returns ranging between 3-4% in light of the high interest rates, and as a result of these conditions, the companies’ business will slow down and their profits will decrease, and they will no longer be able to distribute annual profits at 5-6%, and as a result; The market will resort to rebalancing itself by reducing the share price to levels of 4-5% if interest rates are at 3%.”
safe haven
Yassin said: “All expectations indicate an economic slowdown or a global recession, as the performance of the US domestic product, for example, was negative in the past first half, as inflation is high, and accordingly, interest rates increase, and at that time the investment appetite in the markets will decrease, so it was one of the first, Investing in promising sectors such as digital investments and technology in the stage of economic growth and recovery, since the cost of borrowing is low, and quantitative easing is good. Such new investments will achieve returns of 10% after 3-5 years, since they are long-term investments. In conjunction with the difficult economic challenges, companies resort to buying back their shares to enhance their value in the stages of recovery and growth, and thus raise the value of the share, which will enhance the return on capital.
From this logic, companies should keep cash as deposits, and take into account the few investment risks. Most companies expect interest rates to rise for the second half of 2022. Therefore, companies will buy bonds whose maturity expires, for example, in 2025-224, in order to be purchased at a lower value than their value. Nominally, long-term investing is better done during economic recovery and quantitative easing, not during times of liquidity withdrawal from the markets.
Global release
In turn, the economist, Waddah Al-Taha, said: “The United Arab Emirates topped the attractiveness of foreign direct investment and its flows in the region for the year 2021, with a value that exceeded $ 20 billion, and the indicators for the current year 2022 are very strong and positive as a result of many factors, the most important of which are: general stability and therefore the degree of risk.” It is very low, as well as the distinction of the Emirates with a very strong infrastructure and technology and high international ratings, not to mention the speed of performance and completion of business and the establishment of companies, which is one of the best periods of time to accomplish this at the global level.
Al-Taha added: “The dirham was not affected by the dollar’s rise in light of the US Federal Reserve’s interest rate hike to curb inflation and mitigate its consequences, as the UAE dirham’s link to the dollar is a strong factor, while; The dollar’s rise made a difference against a basket of other major currencies.
Al-Taha continued: “If the investment appetite in the United States is high as a result of high prices and interest rates, then the stability of the dirham and its correlation with the dollar, as well as the existence of multiple investment opportunities in new fields and modern technologies, such as blockchain, artificial intelligence, technological and digital investment techniques, as well as incentives and legal facilities.” Granted by the official authorities to investors in the Emirates, all of these factors contributed to strengthening the investment environment of the country, in addition to that, the entry of new funds from Europe as a result of the high level of inflation in it, as well as the depreciation of its main currency, the euro. It is eroded and depreciated as a result of the depreciation of the euro against the dollar, as it lost the parity level against the dollar.
Al-Taha concluded by saying: “These reasons; It has enhanced the investment environment of the UAE markets, especially on leading stocks in the Dubai and Abu Dhabi financial markets, as a result of its strong financial and operational performance, achieving good profits and distributing annual profits with meaningful returns.
hedge funds
The economist – member of the Board of Directors of the «Emirati Entrepreneurs Association», Dr. Jamal Al-Saeedi, what Yassin and Al-Taha said, and explained that despite the acceleration and great economic growth witnessed by the UAE and the Gulf countries, high inflation rates are still an obstacle that worries investors and companies, as well as individuals. He pointed out that the stock market was one of the most important reasons that helped in the high rates of inflation in prices, as a result of the large liquidity that flowed into the market during the past years.
Al-Saeedi added: “Most companies have the greatest role in reducing the phenomenon of inflation, knowing that one of the reasons for the exacerbation of inflation levels is the continuous rise in real estate prices, which affects all other commercial sectors, stressing that reducing real estate prices and rents would contribute to In attracting more foreign investments that would bring about an important economic diversification and diversification in the UAE.
Al-Saeedi said: “Energy stocks come at the forefront of safe investments, which include oil and gas companies. This is somewhat self-evident. Where energy revenues are linked to their prices, they are also a major component of inflation indicators. So it will perform well at a time of high inflation.” He considered that real estate investment funds; It may provide good protection at the time of inflation and this is very logical, as it owns real estate assets and provides partial hedge against inflation by passing price increases in lease contracts and real estate prices.
Difference
In this regard, Omar Al-Amin, Chief Executive Officer of Orient Insurance Company, said: “The rise in interest rates and the high level of inflation have different repercussions on corporate investments.” Al-Amin added, “Companies that have high liquidity; It will certainly benefit from higher interest rates, and Orient Insurance has cash liquidity of 4 billion dirhams, the highest in the region, as the company’s liquidity represents 65% of its total investments, which exceed 6 billion dirhams.
Re-priorities
In turn, Jerome Droche, Chief Executive Officer of Local and Health Services at Cigna Insurance, said: “The high level of inflation and variable interest rates globally have brought about changes in the priorities of individuals and their purchasing and health needs, explaining: the rise in prices and the level of global inflation have created a rearrangement of priorities. The personality of individuals, compared to the expansion of their health insurance umbrella, for example, and considered that the company’s tendency to raise the prices of its health packages to keep pace with the level of inflation and international prices, is not out of the question, in return for the health coverage provided by the company’s insurance “policies” provided to its customers in the Emirates and around the world in general .
Why did inflation reach record levels in the world?
An economist told Al-Khaleej: There are many things that contributed to the rise in commodity prices in the local and global market in general, and it is within a context that began since the outbreak of the “Covid-19” pandemic, and its impact on the global trade and supply chain, as well as the restrictions imposed in the midst of And the peak of the virus outbreak.
The economist added: Perhaps “inflation” is one of the most important reasons that usually drive up the prices of goods and products. It is linked to two main factors: Is “inflation” short, medium or long term? It also includes all commodities and products and not in favor of a specific group, commodity or product at the expense of another. Pointing out that the world today is witnessing an unprecedented wave of inflation. This is due to several circumstances related to it, the most important of which is: the impact of the repercussions of “Corona” on the supply and supply chain, and how the trade and import movement was interrupted in the midst of the restrictions imposed by the countries of the world coinciding with the outbreak of the “pandemic”.
And he continued, “With the rise in oil and energy prices; As the price of one barrel rose to approaching $100, and it is certain that this rise will be accompanied by a series of rises in all products and commodities that are used in the manufacture of oil and its derivatives. Consequently, the merchant and supplier will raise their prices accordingly. He explained: The volume of cash liquidity in the global and local markets contributed, to some extent, to the rise in prices of various products and commodities. As the countries of the world resorted and rushed to take precautionary and economic policies and financial measures towards pumping more cash liquidity into the markets; To reassure citizens and investors, this led to exceeding the total amount of cash liquidity and total global trade.
The expert pointed out that many countries have resorted to adopting financial and precautionary measures to save their national economies in the form of initiatives and incentives as a result of the Corona pandemic. Where the banking sector pumped into the local markets more “cash”, credit facilities and loans, and waived a lot of taxes, fees and revenues, and banks and central banks in various countries of the world resorted to abandoning hedging and financial control policies, on top of which was the reduction of levels of “legal reserve”. All of this led to the creation of huge liquidity in the market, which eventually led to a rise in the prices of commodities and products.
And the economist indicated that the movement of goods and transportation has become restricted, coinciding with the restrictions imposed by the countries of the world on their trade and the movement of their goods, and it is no longer as smooth as it was before the outbreak of the “pandemic”, and this caused a shortage in global supply and an increase in demand at the local levels of each country. And with the beginning of fading these trade restrictions and in light of the unprecedented rise in products; This led to an increase in commodity prices, especially with the high rates and rates of vaccination against “Corona” and the increase in the percentage of people recovering from the virus compared to the infected.
Mohamed El-Erian: Sticking to cash in the time of inflation
Muhammad Al-Erian, strategic expert at Allianz, said that investors should keep cash and short-term fixed-income assets, and that the stock and bond markets appear “distorted”, which means that the time has come for investors to make some adjustments to their investment portfolios.
El-Erian added: The simultaneous correction, which usually occurs only once every 50 years, means that investors need to pivot to low-risk assets. There was a time when all asset prices (stocks and bonds) had gone up and we “forgot the correlation”; In reference to the rise in assets that occurred during and immediately after the Corona virus pandemic.
El-Erian commented: “Why bother with correlations when you get paid to hold both risk assets and risk mitigating assets? It is a beautiful world.” He added, “But we learned from the first half, and what we learned again since mid-August, is that stocks and bonds can go down at the same time and in a world like this you have to look at short-term fixed income and you have to look at cash as an alternative.”