The president of the European Central Bank (ECB), Christine Lagarde, was very clear at the Sintra meeting: inflation in the euro zone is too high and will remain so. Companies defend their margins and do not absorb rising labor costs. Interest rates may rise again. It will be necessary to wait some time for the trend to change. For their part, investors attribute these behaviors to the policies of central banks, because in the years of cheap money and abundant liquidity, stocks performed better. When interest rates rose, the stock markets discounted that unfavorable times were coming for equities.
The stock market is the barometer of the capital markets. Wall Street analysts compare the price of a share with the sales per share of a company. The world leader in chip production, Nvidia, was trading at 42 times its sales per share. Its benefits are due to its range of supply throughout the world. Facebook, now Meta, Apple, Netflix, Google and Microsoft had a price to sales ratio well below. Tesla was trading at ten times sales, too high for many analysts. Amazon was trading at 2.5 times price on sales.
Markets are too confident in the targets that central banks are aiming to achieve: the Federal Reserve and our European Central Bank say that when inflation hits 2% over the medium term, they will return to their traditional interest rate policies, but it is likely that the 2% becomes 4%. Its effects can be seen if we compare its impact on sovereign bonds. Whoever buys a 10-year bond of 100 euros, with 2% inflation, will only be able to recover 82 euros. With inflation (probable) of 4%, you would only recover 68 euros. When the market demands higher yields, the value of the bonds falls and vice versa, because price and yield have an inverse relationship.
Are investments in real estate, homes or assets that tend to appreciate with inflation more reliable? Are insurance company offers better? In Spain, it depends on the laws and factors that have to do with demography, urban planning and the general elections of 23-J. Shares of publicly traded companies are at risk. If inflation is high, they can raise prices and improve their net profit margin. But not all of them can sell at prices that compensate for the increase in costs and wages. Inditex had hundreds of stores in Russia. He closed them, but recovered the losses. In 2022, it billed 32,569 million euros. It has one of the best profit to equity ratios (25%).
