Robo.cash: It’s vital investors understand effects of inflation
Robo.cash has issued advice to investors on the effects inflation can have on investments, in both a positive and negative way.
Euro area annual inflation is expected to be 8.5 per cent in February 2023, which could “significantly affect investment activity both in the financial market and in the sector of real and venture investment,” the European peer-to-peer lending platform said.
One of the positives Robo.cash highlights is increased company profitability as consumers pay more for goods and services. “As a consequence, this will lead to an increase in share prices, which will benefit investors in the form of returns on their portfolios,” it said.
Inflation may also encourage investors to rethink their portfolios by adding stocks, bonds, and commodities to a range of assets, as they are less affected by inflation.
And bank deposits or bonds may become more attractive to investors as central banks raise interest rates, which in turn raises the rates of fixed income financial instruments.
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However, investors need to be aware of the negative impact of inflation, Robo.cash warns. At a time of high inflation investors’ assets are worth less due to rising prices in the economy.
Furthermore, inflation drives up interest rates, which can make it more costly for businesses to borrow and invest in growth and expansion. “This may negatively affect the overall growth of the economy in the long run, putting it into recession. For investors, this means decreased attractiveness of companies with a large borrowing ratio,” it said.
The European Central Bank raised the key interest rate in July 2022 for the first time in 11 years, and then raised them again in September, October and December 2022, and again last month. Its main refinancing rate is three per cent; the marginal lending rate is 3.25 per cent; and its deposit interest rate is 2.5 per cent.
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Added to that, inflation leads to a decrease in investor confidence, which shows lower demand and falling share prices. “If the uncertainty of investors’ expectations grows, then most likely they will either sell their assets for a certain period of time, ‘cashing out’, or look for assets that are not dependent on inflation,” Robo.cash warned.
“The effect of inflation on investment is a double-edged sword,” the platform added in a blog post. “On the one hand, it stimulates economic activity in the short term. On the other hand, there are also negative aspects, which, if ignored for a long time, in the long run can lead to the downturn of not only the national, but also the world economy.”
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