Mintos Insight: May 2022

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Key insights:

  • As inflation continues to increase across the world, the typical stock-bond portfolio mix is under pressure
  • Both stock and bond values are falling in tandem – causing investors to search for other assets to hedge against inflation risk
  • Commodities and real estate can be used to hedge inflation, plus loans can provide more of a buffer than conventional fixed-income investments
  • In terms of Mintos activity in April, investors earned around €2.8 million in interest at an average rate of 10.7%
  • The average net return for 2022 so far is 2.4%, and the average portfolio value last month was around €2.5k

Where to go in inflationary times?

With inflation rising to unprecedented levels, investors are struggling to shield themselves from its negative effects as the typical stock-bond portfolio is being put to the test.

For the first time in a long time, stock and bond values are falling in tandem, with rising interest rates playing a key role. After a hugely successful 2021, according to the MSCI World Index, global stock values have experienced a notable decrease with a -3.06% return in the first quarter of 20221. And in parallel, bond prices continue to be under pressure. According to the FTSE Global Index, investment-grade bonds returned -4.5% in Q1 20222

As described by Janis Pranevics, Head of Partnerships at Mintos, “historically, stocks have been a good hedge against rising inflation, as they provide an ownership stake in a business(es) and with that, a claim to part of all future dividends. Dividends – unlike bond interest payments, are not fixed in their nature and tend to grow alongside inflation. But the extraordinarily low-interest-rate environment of the past 10+ years has had an unintended side effect.”

Record-low interest rates made bond (and other asset) returns for many investors much less attractive and led investors to seek higher returns in asset classes such as stocks – resulting in stock prices being driven to unseen highs. And now, as central banks (such as the Federal Reserve) aggressively hike interest rates to curb inflation, the foundations of many elevated stock valuations have been eroding.

Balancing portfolio inflation risk

This historic shift in correlations between stocks and bonds has led investors to seek out alternative asset classes as a safe haven from the negative effects of inflation. Fortunately, outside the traditional stocks-bonds portfolio, there are assets where the income produced roughly follows changes in inflation.

Commodity investors, for example, tend to be at an advantage during sustained periods of high inflation, as the price of commodities, such as sugar, oil, and wheat, increases as their finished products become more expensive. Gold, in particular, is a commodity that’s well-known for its inflation-hedging benefits. World Gold Council data shows that at the end of Q1 this year, Gold ETFs reached near-record highs that haven’t been seen since 20163.

Real estate investments, which are tangible assets, also tend to increase in value as inflation rises. According to FTSE Russell, Real Estate Investment Trusts (otherwise known as REITs) globally, returned 3.20% on average in the first quarter of 20224. But because of real estate’s unique characteristics and its susceptibility to interest rate hikes (if leveraged), not all real estate values react in the same way to rising inflation.

Loans as a buffer against rising inflation

Because conventional fixed-income investments like government bonds and investment-grade corporate bonds have had quite small yields due to low-interest rates over the past years, when inflation rises rapidly, an investor’s real return (the return minus inflation) suffers. So in terms of protection against inflation, bonds aren’t exactly providing much at the moment.

Though also fixed-income investments, loans, tend to carry much higher interest rates than conventional instruments. Plus the shorter-term nature of loans means interest rates can adapt to market changes more quickly. The average interest rate for loans available on Mintos, for example, is 10.7% and the average term is 23.7 months, with regular principal and interest payments. Thus, providing more of a buffer to secure an investor’s real return against inflation.

At the end of the day, inflation risk is just one of the risks that an investment portfolio is exposed to. So having a well-balanced, diversified portfolio can still be very beneficial, even in a high inflation environment.

Mintos Activity: April 2022

In April, around 300 000 loans were funded equivalent to €63.6 million, and investors on Mintos earned around €2.8 million in interest at an average rate of 10.7%. The top 3 markets for investments in loans were: Spain, Latvia, and Poland.

According to Peteris Mikelsons, Account Management Team Lead at Mintos, in April, activity was “similar to the second half of March. During April, investor sentiment slowly yet surely started to return with Outstanding Investments increasing to €374m (excluding loans from Russia, Belarus, and Ukraine). The average interest rate continued to increase, reaching its peak at the end of the month of 12.2% for loans denominated in the Euro, and several lending companies continued or started to offer cashbacks for their loans.”

Mintos information on the war in Ukraine

For updates on the war in Ukraine, sanctions for Russia, and other related topics, please visit the Mintos blog.

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If you’d like to read any previous Mintos Insight publications, you can find them in our Mintos Insight library .

Disclaimer:

This is a marketing communication and in no way should be viewed as investment research, advice, or recommendation to invest. There is no guarantee to get back the invested amount. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.

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