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Brexit related news about finances and trading

Central Banks Started Buying Gold Again

Gold is like a mini skirt, periodically returns to fashion and again becomes a hit, although numerous economists have written it several times as a “relic of barbarism”, which has neither the purpose nor the future in the modern world of finance. But faced with an uncertain future, central bankers in gold still see a sort of “insurance policy”. The new golden fever is led by Russia and China to reduce US dollar participation in its foreign exchange reserves, while in Italy, which is ranked third in the world’s gold reserves, the current government is trying to formally transfer ownership of gold reserves from the central bank to the government.

Last year, at the global level, the central bank bought 651 tonnes of gold, a record amount in recent years, and the new golden fever is led by Russia and China whose central banks buy gold with full steam while at the same time reducing US dollar participation in their foreign exchange reserves.
In the case of Russia, this is not too surprising as it faces US sanctions, de-dollarization is the official policy, in order to reduce the overall dependence of the Russian economy on the dollar and the international financial system, which is practically under the effective control of the United States.

The trend is changing, because at the end of the nineties, the belief that gold days were counted, and the central bank of Great Britain, Canada and a number of other countries, sold their gold reserves, only to be solved. An extreme example is Canada, which has sold its entire gold reserves over the past ten years, while Britain has reduced its reserves to 310 tons in 2008 from 588 tonnes in 2000, and remained at that level to date.

Russia quadrupled gold reserves

With massive gold buying, Russia began ten years ago, following the global financial crisis of 2008, when Russian gold reserves amounted to a relatively modest 519 tons of gold. At the end of last year, these reserves rose to an impressive 2.113 tonnes. Russia practically quadrupled its gold reserves over the last 10 years, with only 275 tonnes of gold alone last year. In all likelihood, the Central Bank of Russia will continue to accelerate the purchase of gold, while reducing the share of dollars in its foreign exchange reserves.

The situation is similar to China, which in 2008 had 600 tons of gold in foreign exchange reserves so that at the end of last year this amount rose to 1.852 tons. In the case of China, the motives are slightly different than in Russia. China is under the political and economic pressure of the United States, but it is far from sanctions imposed on Russia, and it is unlikely that China will be in such a position, as it would effectively lead to the collapse of the global economy, bearing in mind that most global companies have long moved production in China.

But China has a dollar problem as there are too many of them, as a result of a trade surplus with the United States and the rest of the world. For China, this is a problem because unlimited printing of the dollar, from a million called “quantitative easing,” sooner or later leads to a fall in real value, which is bad news if you have thousands of billions of dollars in exchange for completely tangible products. Long-term Chinese ambitions are that the yuan be accepted as a global currency, in the same ranges as the dollar and the euro, which implies stability and confidence, and regardless of the fact that the golden currency coverage has long been rejected, in the moments of the crisis, gold is still what counts.

Financial Markets: Over the Edge

The atmosphere in the financial markets is exactly the same as it was before Lehman brothers did not fulfill its obligations. I remember being almost lonely in thinking that Liman would sink, and the market and the Federal Reserve sought salvage solutions at the last minute. The choice is now similar. Lehman was then perceived as too “difficult” to rescue; In fact, very few people wanted to help them, and do not forget: Lehman paid a significant premium to finance +100/200 bps in one week of deposit much before 2008, according to his latest analytical text on the occasion current situation in Greece chief economist Sakso Bank Steen Jakobsen (Steen Jakobsen).

Lehman was in charge of 30 / 35x in his final account, and the Greek debt was/is similar. The risk is also similar and comes from a thinking system that always tries to buy a little more time, and it never yields results, says Jakobsen.

The US Federal Reserve Plan for Liman brothers was: buy A more time under A, and plan B was a “stick and carrot”. When it all collapsed, Plan C was a panic and a lack of a plan. Liman had no plans, like Greece, says Jakobsen and adds: “The plan can not have a plan, as we can see now.

Now there are difficulties with non-linear movements in the market, so it remains to be hoped and trusted. But the expert of Sakso Bank points out that the greatest risk is inflated value risk and adds that it will cause unwanted consequences, as it had already happened with Bulgarian and Romanian bonds yesterday, and Puerto Rico is unlikely to pay its arrivals as well as higher euro values.

The market is looking for “good risk protection”, which does not actually exist, says Jakobsen and states that during his career while running a risky business, he realized on a number of occasions that there is not enough good risk protection – but that there is only a situation Do not get in the wrong position.

The inability to reach an agreement at the last minute could cause a drop in the Dax Index by an additional 3-5% and a risk explosion in the new member states of the Eurozone such as Hungary, Croatia, Bulgaria, and Romania. Even Poland could feel the consequences, analysts quoted chief economist Sakso Bank as saying.

Stating that investors might have been a good holiday for some six months now, Jakobsen says the Shanghai market, where it is currently located, looks nervous on the eve of the opening, as indices fell by 22% from this year! In the meantime, as illustrated in this article by the Bloomberg Network, he concludes that Siriza continues to play games, even in a situation where we are on the brink of civil unrest and shortages of fuel, the euro, and food.

Central Banks Under Big Pressure: Is This End of Their Independence

When the times change, the customs also change. In the time that we are witnessing, it is difficult to give up the impression that we are crossing the border of a world we have known so far and embarking on in a new era, with customs and norms whose “contents only come to light and, according to recent experience, shape themselves.” Many things change, so the institutions are at least prone to change. About central banks is also their independence. Still, who would say that this will happen so fast !?

The independence of central banks is a relatively new phenomenon. They struggled for that precious status during the period called “Great Moderation”, during which significant volatility of the economic cycles was significantly reduced, as well as a pronounced fall in global inflation, which, among other things, was due to the adequate monetary policies authorities. This, on the other hand, allowed central banks to focus on price stability as their primary goal. In this way, a policy of targeted inflation was put in the main plan, which further enabled even greater operational autonomy of central banks.

However, as always, there is a dark side of the story: the consequence of this policy is that the monetary authorities generally ignored the formation of large bubbles in stock markets and other financial assets, which further led to the growth of risk and instability in the banking sector. The current crisis, initiated by the fall of Leman, is the most obvious example where the cracking of such bubbles can lead. Although with fewer wanderings, central banks responded quickly to the current crisis, they were forced to abandon the targeted inflation target policy and venture into the unexplored space of unconventional measures, increasing the uncertainty surrounding the exit strategy.

Today, central banks are asked to stimulate economic growth, support the stability of the financial system, and reduce the costs of state funding, and sometimes ensure its solvency, in the context of the crisis and rising demand for energy and raw materials by high-growth countries, which increases the risk of new price increases. As a result, central banks are facing an almost indolent dilemma, which requires a fundamental redefinition of their goals and roles. The independence of these institutions seems to be the first victim to be brought in this new time, because, as it stands out, support for growth in GDP, employment and financial stability requires primarily the decisions of those who, unlike the bankers, have, at least, formal, political legitimacy. This is especially evident in the context of a highly aggressive monetary policy, which will have significant consequences for both countries as a whole and for each individual within them. This, as well as other aspects of the inevitable redefinition of the concept of independence of central banks, was made by former central bank governor Mario Bleher in an excellent text on the prospects for the independence of these institutions.

The Risk of Poverty Pervades Every Fourth Citizen of the EU

Almost 25% of the European Union’s population or 122.6 million people were at risk of poverty or social exclusion in 2013, according to Eurostat data. The risk of poverty is most threatened to the citizens of Bulgaria and Romania, and least to those in the Czech Republic and the Netherlands. At the same time, every tenth citizen of the EU lives in scarcity and does not have enough money to pay bills or extraordinary expenses, no cars, a TV or a telephone. The same percentage lives in households where adult members are mostly unemployed.

The share of the population affected by poverty or social exclusion in the total of 24.5% in 2013 was slightly lower than in 2012 (24.8%) but also higher than in 2008 (23.8%).

In 2013, in five EU Member States, more than a third of citizens were at risk of poverty or social exclusion – Bulgaria (48%), Romania (40.4%), Greece (35.7%), Latvia (35.1% ) and Hungary (33.5%).

The smallest share of citizens who are at risk of poverty or social exclusion in the total population is registered in the Czech Republic (14.6%), the Netherlands (15.9%), Finland (16%) and Sweden (16.4%).

Between 2008 and 2013, only 7 EU Member States registered a decrease in the number of people at risk of poverty or social exclusion – Poland (from 30.5% of the total population to 25.8%), Romania (from 44.25 to 40, 4%), Austria (from 20.6% to 18.8%), Finland (from 17.4% to 16%), Slovakia (from 20.6% to 19.8%), Czech Republic (from 15.3 % to 14.6%) and France (from 18.5% to 18.1%), while in Belgium their share stagnated.

Every tenth is deprived of a lot of things

For 9.6% of the EU population, they are considered to live in a difficult financial situation, which means they barely pay bills, rarely eat meat and can not spend a week off resting. In 2012, in a very difficult financial situation, 9.9% of EU citizens were present, but in 2008 they were less – 8.5%.

The percentage of people in material poverty differs from country to country and goes from 43% in Bulgaria, 28.5% in Romania and 26.8% in Hungary to less than 2% in Sweden (1.4%) and Luxembourg (1, 8%).

Compared to 2008, the share of people suffering severe material deficiencies increased in 15 EU member states, in Slovenia and Sweden it was stable and in nine countries it was reduced.

When it comes to work intensity, in the EU, 10.7% of people aged 59 and over live in households where adults work less than 20% of the time they can work for over a year. The share of these has been growing since 2008.

The largest share of those living in homeless households was Greece (18.2%), Croatia (15.9%), Spain (15.7%), Belgium (14%) and Great Britain 13.2%) and the smallest in Romania (6.4%), Luxembourg (6.6%), the Czech Republic (6.9%), Sweden (7.1%) and Poland (7.2%).

Compared to 2008, the proportion of people living in low-intensity households increased in almost all EU member states, except in Romania, where it fell from 8.3% to 6.4%, Germany (from 11.7% to 9 , 9%), France (from 8.8% to 7.9%), Poland (from 8% to 7.2%) and Czech Republic (from 7.2% to 6.9%).

The European Statistical Service has set the poverty risk threshold or the relative poverty line to 60% of the middle income (50% of the population is 50% less than the average income).

Effect of Brexit on Financial Services Industry

Last year there was a historic event that got branded as “Brexit” in the UK, where 52% of its population voted the country to exit the EU. From that time, there have been many speculations about the effect of Brexit on the economy of the UK, specifically the financial services industry. In this article, we shall look at all the effects of Brexit on the financial services industry.

The instant effect of the Brexit vote on financial services industry was by all means harsh. Apart from the stock markets plunging, and the sterling suffering, the consumer confidence reduced. From that time, the markets have restored, eliminating worries of instant downfall for the British economy. Even so, powerful doubts about the long-term effect of Brexit on the economy of the UK remains. 

Further, among the most talked-about industries in the financial industry for the following reasons:

  • The financial sector is, by all means, a great influential industry in the economy of Britain, and it contributes 12% to the total GDP of the UK.

Assuming the output numbers, it creates over two million jobs, and it is the UK’s largest export sector, which is almost 50% of the trade surplus in the UK in services. Also, the importance of the UK’s financial sector in the EU is defined. Further, British banks lend almost $1.4trillion to companies and governments in the EU. Most financial activities that get performed in Europe are either direct or indirect carried out of London.

  • The financial sector is among the main benefactors of the single market. Indeed, the EU is deeply formed in economic motivations. So, it is no surprise the bulk of the post-Brexit downfall has concentrated on financial services.

However, six months later, all London finance experts are undertaking their daily lives as it was before the vote.

Is Brexit a big deal?

Yes, it is. An examination of the problems and worries associated with the financial industry raise a number of worrying deductions.

In specific, these deductions are centered around; passporting, talent-drain, and regulatory uncertainty.

Passporting

What is it, and why is it important?

Up to this point, the most essential issue at hand is related to passporting. It is the procedure that any financial institution that is British- based for example banks, asset management firms, and insurance providers can apply in selling goods and services to other EU countries without getting a license, setting up local subsidiaries for the work, or getting regulatory approval.

Indeed, passporting is among the primary reasons why many financial institutions have erected their headquarters in London.

As per a recent study, almost 5,500 firms in the UK depend on passporting to carryout business with other EU member states. Also, over 8,000 firms in the EU use passporting rules to trade in the UK.

Pursuing a “Norwegian deal” with the EU is the only means Britain can continue gaining from passporting. However, this is highly impossible, as Britain will compromise on issues that resulted in Brexit.

In this case, the UK can use the single Free Trade Agreement like the negotiation between Canada, South Korea, and EU. But, the negotiations are complex and long. Further, they might lead to limited conditions than those allowed by the current passporting rights.

Brain drain and its dangers

The other reason why Brexit may result in long-lasting destruction to the British financial industry is the fact that it might start a harmful procedure of brain drain. This might undermine one of the main reasons that made London rise to prominence.

Similar to Silicon Valley, London gains from a huge mass of world-class, industry-particular talent that have close proximity to their place of work. However, this might not be the case due to Brexit. Indeed, disruptions like visa uncertainty for foreign employees and job loss may make the talent move elsewhere.

Further, the findings of a recent report were that if the present visa system will be applied to EU migrants, then three-quarters of the EU’s workforce in the UK might not achieve these requirements. As a result, this might cause a crisis in London, as 12% of its workforce is European, more so in the financial sector.

Reversing this will be extremely difficult.

Regulatory uncertainty

The regulatory uncertainty is another major issue connected to Brexit. Without any doubt, among Britain’s strengths as per history has been regulation. This is at least why London managed to be Europe’s and the world’s financial capital. Here are two reasons for this:

  • The British labor laws are easier and employer-friendly compared to that of its European counterparts.
  • English law has specific applicable benefits for things such as insolvency laws and debt issuance.

However, Brexit to some extent complicates this despite being a historical strength. To start with, Britain must either renegotiate or replicate over 40 years of EU regulations, as well as trade deals. Indeed, this will take a lot of time, which most financial services firms cannot wait.

Second, it is unclear if the new UK financial regulations will be ideal for the industry. For this reason, Brexit-proponents claimed to be in favor of Brexit.

Nonetheless, although independent regulatory environment may be beneficial in the long-term, most London firms might be unable to bear the short-term effect of regulatory uncertainty.

I hope this article was helpful in explaining the effect of Brexit on the financial services industry. You can also read our article on Economic Effects of Brexit.

The Effect of Brexit on Global Trade

Trade flows between the EU and the UK has already been affected by the results of the UK’s Brexit referendum, and the looming leaving negotiations. In this article, we shall discuss the present trade flows and potential effects of Brexit on the intra-European trade.

A free internal market

At the moment, all EU countries which comprise the UK entirely gain from the EU’s single market. The benefits include free duties and quotas for all EU member states carrying out business and trade via the EU. Also, the free movement of people enables access for services and workers. Further, easier customs processes minimize the administrative baggage for companies that trade within the EU to a minimum

Countries with strong trade ties with the UK are nearly vulnerable to the instant economic effect of Brexit. The biggest trading partner of the UK in the EU in terms of volume in Germany. But, Ireland is the most dependent on the UK trade in regards to total imports and exports.

In the Western European nations, Belgium, Germany, and the Netherlands export greatly to the UK, more than their importation from the UK. So, these countries might face a decrease in their trade terms with the UK, based on their exportation price elasticity. Further, trade cost between the EU and the UK will be greatly raised by post-Brexit results.

The EU countries that export most of their goods to the UK, relative to their economy sizes are Ireland, Cyprus, Netherlands, and Belgium. Although Germany export volumes are the greatest in Europe because of its big size, it has many other great export locations. These might compensate for any decline in the UK due to Brexit.

Future UK trade flows

After the UK exits the EU, some industries will get hit harder than others. Among the industries which may encounter the greatest export effects are motor vehicles and spares, processed foods, and electronic equipment.

In fact, motor vehicles are the only commodity with the biggest trade share between the EU and the UK. Because, the UK is both a great manufacturer of motor vehicles and spares, as well as a great vehicle’s market. The primary export market for the UK in the EU, which accounts for 57.5% of vehicle exports.

On the other hand, Brexit will affect the UK’s services industry the most. As indicated by a recent HM Treasury analysis, the services industry makes nearly 80% of the entire UK economy. Besides that, London is not only a global financial center but also the greatest in Europe. In addition, almost a third of the insurance and financial services that get exported from the UK to the EU. Also, there is a trade surplus from the UK to the EU.

Moreover, Brexit will affect how the UK trade with the other world. For the last 20 years, the EU negotiated 36 FTAs with 58 non-EU countries. As a result of Brexit, it would not gain from these agreements. Instead, the UK might consider renegotiating trade deals with these countries. The process is expensive and time-consuming.

Effects on trade

Increased trade costs

The effect on the EU-UK trade will rely on their relationship after Brexit. The most possible cases are a fallback to WTO rules or a detailed free trade agreement. As a result, there will be an increase in trade costs between the EU and the UK. These costs are tariffs & quotas, raised administrative burden, and behind-the-borders rules which state the degree of non-tariffs barriers(NTBs) for trading. For example, origin needs, safety &environment standards, and health.

Chances are that the increased costs will be started by businesses, and then get transferred to consumers.

Transfer pricing

The trade-based fiscal control will also be affected by Brexit. Indeed, companies that will be transporting either products or services to and from facilities in various EU countries must tax in those countries. All corrections to intercompany transactions, the products are in most cases double-taxed by various tax authorities. But, companies can at the moment avoid this kind of taxation in the EU via the EU arbitration convention.

After Brexit, the UK will cease to be a member of EU fiscal legislation. But, can the Brexit affect the EU arbitration convention because it is a treaty achieved among the member states? Since the convention is not in the remit of the EU, its revision can only be requested by the member states in contract. Besides that, they are the only ones to approve the revision.

Reconsideration of locations in supply and value chain

For competition purposes, supply chains are increasingly becoming useful. Also, they are increasingly being globalized because most companies are determined to lower the sourcing, production, and delivery costs. In addition, companies are aiming for higher service levels because the expectations of consumers are associated with quality and increased the speed of delivery.

The use of the UK in international supply chains is specifically higher in some industries. These are whole and retail, telecom, transport, export in chemical and mining products, professional and financial services industries. All these are vital to international supply chains.

After Brexit, there might be a need for rebalancing the EU’s market global supply chains. Also, uncertainty on trade policies and their impacts on trade between the UE-UK might affect investments done in the supply chain pattern. Further, companies that make planned capital investment choices on factories, logistics, or warehouses abilities in most cases consider the UK to be the location. Thus, these decisions might be postponed due to Brexit, while others will favor non-UK locations.

Macro-economic effects

A study by the Netherlands Bureau for Economic Analysis shows that Brexit might lower bilateral trade that exists between the UE and the UK. As a result, there will be great reductions in GDP, as well as in real income per capita. Because the increased trade costs between the EU-UK will result in the less important allocation of resources in industries.

In addition, the type of post-Brexit that the EU-UK trade deal will achieve determines the degree of losses. If the trade deal will revert to the WTO rules, then the remaining 27 EU countries will encounter a 0.8% GDP reduction in the year 2030. But, the Brexit losses from an FTA case might be less big, based on the details of the specific agreement achieved. Ireland, Netherlands, and Belgium would encounter the greatest losses to GDP.

The various areas of Finance

What is Finance?

Finance is a special sector which involves investing or allocating the resources for a calculated period of time. Usually, this investment involves risk and uncertainty. You can consider Finance as a money-making and management art. There are three major areas of finance. Financial market participants strive to price their liabilities depending on their level of risks, dangers, primary value and their anticipated rate of return. Finance involves a wide range of topics such as Interest rates, yield, cash flow, dividends and much more.

Finance can be easily divided into three main areas, namely, public finance, corporate finance, and personal finance.

The three major areas of Finance

Personal Finance

In this area of Finance, financial management involves an individual or a family. An individual or a whole family performs financial management for their own assets and liabilities. They procure, save and invest their money by taking into account the financial risks and life events. When financial planning is carried out, the individual person would consider his or her needs and life events.

Personal finance revolves around the following:

  • Protection against unavoidable life events and events in the broader economic systems.
  • Allocation of ancestral wealth through generations, i.e. inheritance.
  • Tax policy effects on personal finances.
  • Effects of credit on personal economic status.
  • Strategizing the safe economic future in an environment of economic uncertainty.

Personal financing may require paying for education, funding sustainable commodities such as real estate and vehicles, purchasing insurance, e.g. health insurance, saving and planning for retirement.

The four crucial aspects of personal financial preparation are-

  • Financial situation- It involves knowing the private assets accessible by analyzing net value and cash flows from households. Net value is the balance sheet of a person, calculated at one point in time by adding all assets under control of the individual and subtracting all household liabilities. From this evaluation, the financial planner can decide to what extent and in what time period the personal financial goals can be achieved. This same method can also be implemented on a personal level as well. Ratios are generally used at the corporate tier to assess the potential of a company to bear its costs with the help of its assets.
  • Appropriate protection– Analyzing how to secure a household from unanticipated potential risks. These potential risks can be split into the following:  assets, mortality, physical disability, health, and long-term care. Some of these potential risks may require to purchase an insurance contract.
  • Fiscal planning- Usually, income tax is the single greatest household expenditure. Managing revenue is not a matter of paying taxes, but when and how much to pay.
  • Strategies of investment and acquisition– It involves planning how to collect sufficient funds – for big acquisitions and life activities – is what most individuals regard economic planning. Primary reasons for accumulating wealth include buying a home or vehicle, beginning a company, paying for educational expenditures, and saving for a pension.

Corporate Finance

Corporate finance involves dealing with the sources of financing and commercial cost structure, the activities of executives taken to improve the worth of the company to shareholders, and the techniques and analysis used to allocate monetary funds. Although it is distinct from institutional finance, which analyses the financial planning of all companies instead of corporations alone. The primary ideas in the research of corporate finance apply to the economic issues of all types of companies.

Corporate finance usually includes managing risk and profit margins. While it tries to increase the wealth of an organization, gross incoming money flow and the price of its shares and includes three main fields of capital allocation of resources. Financial management coincides with the accounting profession’s economic feature.

Corporate Finance is one of the crucial areas of finance. It also involves business assessment, shares market investment or investment management within its scope. An investment is an accumulation of an asset in the expectation that it will preserve or improve its value over a time period, which will hopefully yield a greater degree of return when it goes to dividend disbursement. In asset management, one has to carry out an economic assessment to ascertain when, how many and what to invest.

Public finance

Public finance defines financing as linked to independent states and sub-national organizations (provinces, counties, communities, etc.) and associated government institutions (e.g. college districts) or organizations. It generally includes a long-term pragmatic view on investment strategies that influence government companies. These strategic long-term phases generally include five years or more of time. Public finances mainly associate with:

  • Recognition of the necessary public sector expenditure.
  • Source(s) of the earnings or revenue of that entity.
  • Debt issuance (corporate bonds) for initiatives in government projects.
  • The procedure of budgeting.

Central banks, such as banks of the Federal Reserve System in the United States and Bank of England of UK, are powerful participants in public finance, serving as lenders of last resort as well as powerful impacts on financial and lending situations in the economy.

Finance is the art of money management and includes practices such as investment, lending, borrowing, financial planning, and saving. I hope this article was able to elaborate on the different areas of finance and gave you a basic understanding of finance.

Do you like reading about Finance? Read our article on Equity.

Why Equity is not safe in the long term

In most cases, people risk so much when they believe the myth saying equity is safe in the long term. Nearly every person accepts and believes that in the long term, equity is safe.

For instance, nearly everyone believes that in case you will be retiring for over five to ten years to come, then investing a huge amount of your net worth in the equity is safe. But, this myth has been dismissed by all finance principles, theory, and data. Further, believing in this myth might have serious consequences sometime in the next decade or so. The statement “Equity is safe in the long term” is a useless statement which cannot be tested. In fact, an exact copy of this statement is that “Holding equity for at least five or ten years, you are certain it will fit inflation. Also, on average, it will make more returns than inflation.”

The complexities of Finance

There are complexities in the theory and rules of finance. Thus, we shall concentrate on the data.

In India, it is over 10 years after the 8th January 2008 market peak, the NSE Nifty 50 Total Return Index has not yet reached the cumulative inflation. Even so, the Indian data has a precise history, making it less important for the analysis. Actually, the price indices are available for slightly above over three decades. As a result, we had no option but to analyze international data.

The US has the best data which is available for use. However, for the last 118 years, the US remains to be among the top-performing markets. Thus, there will be great biases in the conclusions, if you shall just focus on US data. For this reason, you should consider data from many countries as you would like. This is what three professors from London Business School did. They examined several countries, starting from the year 1900. Besides that, the important data from their study is a summarized version of the 2018 Credit Suisse Global Investments Returns.

The nominal returns

In our daily life, we do talk about returns, and these are known as nominal returns. For instance, a fixed deposit’s interest rate. Also, real returns are nominal returns minus inflation. Therefore, as indicated by the report, here are the longest cumulative negative equity real returns. 51 years in Japan, 55 years in Germany, 54 years in France, 22 years in the UK, 16 years in the US, 27 years for the world minus the US, and 22 years for the world. In short, for a duration of 54 years, the cumulative equity returns in France never matched inflation. One example in this list ended in 1982(France). However, the list has some recent examples too.

Within the US, the S &P 1500 TRI failed in early 1973, and after 12 years, it managed to reach the cumulative inflation in early 1985. Likewise, it failed in the mid-2000, and in mid- 2013, it regained from the cumulative inflation.

Moreover, it is in late 1989 that the Japanese Nikkei 225 Price Index attained an intra-day peak of 38,957. However, it is 45% lower today, at 21, 124. Also, the cumulative returns of the Japanese stock market are lower compared to the cumulative inflation for the last 29 and a half years, irrespective of factoring in the dividends.

The myth about equity

Among the reasons why people take higher equity risk is the fact that they believe in the myth saying equity is safe in the long term. However, the truth is that for a duration of 5-10 years, the probability of equity matching is higher. However, there is a material probability of the equity generating returns which are lower than the inflation.

Furthermore, inflation-indexed bonds to a larger extent are not available in India. As a result, Indian citizens have no option but investing in equity and real estate so as to avoid the unusual risk of higher inflation.  Nonetheless, these are risky investments, and higher allocation on risky investments might result in permanent loss of half of that investment. Thus, you must look for some middle ground and move towards investing in less risk. Even so, the recent higher returns from equity have made most people to do the exact opposite.

The conclusion

Well, investing in equity is a good option. But sometimes, it can also be risky. And usually, people don’t prefer it for the long term. You should be really careful while investing your capital. You should pay full attention to each and every detail and make the decision accordingly.

Interested in Finance? Read our article about areas of finance.