The global economy is still feeling the influence of the war and its consequences, creating trends that could significantly impact investments. Around seven weeks ago, we discussed how the Ukraine conflict was affecting the financial markets and how to invest in times of war.
In this article, we want to go deeper into current market developments, discover how stocks and other assets performed, what’s going on globally, and how P2P lending can fit into the bigger picture.
Inflation – 8.1% EU Average in April
As of February 2022, Inflation rates were at 6.2% EU-wide; however, this increased to 8.1% on average over the whole European Union. While countries in Scandinavia like Finland and Norway have a “mere” 5.9%, many countries in Eastern Europe are feeling the effects of inflation, with rates going up to 16.6% and 19.1% in Lithuania and Estonia, respectively.
When looking at these numbers, one always has to consider how these figures are calculated. The basis is an imaginary shopping cart with products and services that the average citizen uses in everyday life. Measuring the change in these prices on a yearly rate leads to the inflation rate by looking at the so-called Harmonised Index of Consumer Prices (HICP).
This means that if your household uses more or fewer products and services in one category than the average shopping basket, then your personal inflation rate is likely different from the average for your country.
According to the Inflation Dashboard of the European Central Bank, “transport” and “housing, electricity, gas etc.” increased by way more than the average inflation rate, whereas “Health”, “Communication” and “Clothing, Shoes” were impacted less. “Education” even got cheaper.
And while “Food and beverages” are listed at a 7.4% price increase in the Euro area, many people will offer different stories about the rise in grocery prices. Prime examples are wheat flour and sunflower oil, but also higher priced produce due to increasing gas prices.
Stock Prices – Fear & Greed Index at “Extreme Fear”
The MSCI World, a stock index mirroring the world economy, has been on a downward trend since the beginning of April, going from 3081 to 2680 points – a 13% decrease. Big tech stocks, including Netflix and Tesla, have seen 50-60% price drops from where they were last year.
Where’s that coming from? The CNN Business Fear and Greed Index, a metric used to determine if stocks are reasonably priced and gauge stock movements, shows “Extreme Fear” in the market. The same period seven weeks ago, the index still stood at “Greed”. Investors fear a recession and are backing out of the market.
Other reasons could be the aforementioned high inflation rates and continued lockdowns in China, one of the world’s biggest economies and biggest exporters. Add to that supply chain issues and a rise in oil prices, and you have a recipe for fear.
Many new retail investors started investing during the pandemic, and since April 2020, when prices were at their lowest, the stock market knew only one way – up, up, up. If these investors now have the prospect of facing a recession with declining markets and have never been through a bear market, the action of selling out of fear and uncertainty is reasonable.
Crypto Crash – Coins Were Mooning
Investing in cryptocurrency is not for the faint-hearted. It’s a young and very volatile asset class, where an investment can produce 100%+ in one year, but just as easily bring a total loss the next. Unfortunately, we saw a prominent cryptocurrency named Terra (LUNA) experience the latter at the beginning of May.
While not going into too much detail, a closely related project to Terra (LUNA) called TerraUSD (UST) had a significant issue on May 9th. UST is supposed to be a stablecoin, a coin that holds a stable value – in this case being pegged to 1 USD. However, on that Monday, UST de-pegged and was worth less than 1 USD.
Both UST and LUNA projects are closely connected, which sent LUNA into a plummeting frenzy. The coin was valued at 50 EUR on Monday at 4 pm UTC, and just 48 hours later, it was valued at 2 EUR. Furthermore, another 48 hours later it hit just 0.00012 EUR – which is a 99.99% drop!
And Terra (LUNA) was no small fish. LUNA and UST were the 9th and 10th largest cryptocurrencies by market capitalization according to CoinMarketCap, with LUNA having been valued at 18 Billion USD. To visualize:
· If you held 1,000,000 EUR worth of Luna on May 9th, it would now be worth 2.40 EUR.
The consequences? Flagship cryptocurrency Bitcoin dropped, pulling the whole market down with it. It’s possible that some investors also sold their equities due to needing to pay taxes or fund their lifestyle. But this is speculation at this point.
P2P Lending in the Bigger Picture
How does P2P lending fit into this picture of bear markets and high inflation rates? While stocks and crypto are equity assets, P2P lending offers a fixed income. The average for the S&P 500 may be 10.6% over the past 30 years; however, this means that prices can go up 20% one year and down 10% another year. So, you have some volatility there.
On the contrary, P2P lending often gives you a fixed interest rate, providing a stable income. This makes it an excellent addition to a portfolio composed mainly of stocks, where prices fluctuate. There are many more benefits as well.
Depending on the type of loans offered on a P2P platform, you could look at interest rates from 8-16% (on Lendermarket), making them an option to beat the current inflation. Coupled with a BuyBack Guarantee as Lendermarket has, you mitigate the risk by having the guarantee that the loan originator buys back the loan if the borrower defaults. And via AutoInvest, you can invest in numerous loans with ease.
Conclusion
High inflation, falling stock prices, people worried about a recession – one could think that the people preaching a big crash are correct. However, many gears are turning in this global economy machine. What happens if supply chains recover and go back to functioning like normal? What if the war ends faster than expected, assuming China stops its zero-COVID policy?
Many things could happen that have the potential to bring back the prices we are used to. One thing is for sure though – you should still think about investing and saving money. As highlighted, investing in P2P lending is an excellent addition to a portfolio usually made up of stocks and even real estate, as it provides a stable cash flow with inflation-beating interest rates.