In 2023, almost all investments were successful. The greatest appreciation came from shares (around 20%). Higher than average returns were also recorded by bond funds (8-10%). Apartment prices have fallen, but thanks to rents, most real estate funds have recorded returns of around 5-8%. The price of gold increased by 13% and that of Bitcoin by 155%. Last year it was virtually impossible to step aside, except for China or commodity funds.
Falling inflation, falling interest rates
The year-on-year inflation rate fell to 6.88%, with the consumer price index already rising over the past 11 months only 0.82%. It’s time for CNB to lower interest rates. Interest on savings accounts will decrease. The same goes for returns on deposit funds or anti-inflation bonds. Anyone who wants to evaluate savings will have to invest.
In January the year-on-year inflation rate will decline significantly. Central banks are expected to gradually reduce interest rates until 2024. How the context should be particularly favorable for bond, real estate and private equity funds. Stocks could also do well, but this is uncertain. I now see the main risks above all in the further exacerbation of geopolitical tensions (the threat of a blockade of Taiwan, the threat of a war in the Persian Gulf, etc.)
Inflation and interest rates in the Czech Republic for the years 2007–2023
Author: FINEZ Investment Management, sro
Shares are back on the rise
In 2023, stocks performed very well, virtually everywhere in the world and across all sectors. The values of the main stock indexes have risen to the same level as the highs of the end of 2021. The value of the global stock index MSCI World has increased by 17.6% (in euros) over the past year.
Table: Development of stock markets in 2023
Stock market performance in 2023 MSCI World (in EUR) 18% S&P 500 (in USD) 24% MSCI Europe (in EUR) 13% MSCI China (in EUR) −16% PX (in CZK) 18%
In particular, American technology companies performed extremely above average (Apple +48%, Microsoft +57%, Alphabet +58%, Amazon +81%, Meta Platforms +194%, NVIDIA +239%). In Japan and Taiwan, stock prices also increased by an average of 26%. Polish stocks also recorded a strong appreciation of 30%. In China, by contrast, stock prices fell by an average of 16% last year. In the Czech Republic, stock prices increased by an average of 18%.
Expectations for 2024 are very mixed for stocks. Stock values mainly depend on the profitability of companies. It is difficult to predict what 2024 will bring. We can only say that in the long term, corporate sales and profits will increase with inflation. Stock markets have room for further growth. On the other hand, relative to bond interest, stocks are not cheap today, with the average gross dividend yield for US S&P 500 stocks only 1.5%.
Trend in the value of the S&P 500 index and company profitability in the years 1990–2023.
Author: FINEZ Investment Management, sro
Golden times for bonds
In 2022-2023, central banks around the world significantly increased interest rates in response to high inflation. This has been very bad for older low-interest bonds. At the same time, it was after For many years it has been possible to purchase bonds with attractive interest income and then set high interest rates for several years. Now interest on bonds has already started to fall, as inflation is already falling and interest rates are expected to fall.
Performance of the yield to maturity of ten-year government bonds of the Czech Republic.
Author: FINEZ Investment Management, sro
In 2022, the yield to maturity of ten-year Czech government bonds rose to 6% per year, but by the end of last year it had already fallen below 4% per year. Similarly, in the United States the yield to maturity of 10-year government bonds has fallen from 5% annually to 4% annually in the past three months and in Germany from 3% annually to 2% annually
Table: yield to maturity of 10-year government bonds
Yield to maturity on 10-year government bonds Germany 2.0% USA 3.9% Czech Republic 3.7%
Funds are now benefiting from falling bond interest yields. Over the last year, bond funds have recorded an average appreciation of around 8-10%. Riskier high-yield bond funds or bond funds focused on emerging markets have seen returns even above 10%.
It’s what is expected Central banks will gradually reduce interest rates during 2024. In December the Czech National Bank already reduced the repo rate from 7% to 6.75%. Interest rates on bonds with longer maturities have been falling for some time, and interest rates on bonds with shorter maturities will now fall as well. When interest rates on new bonds fall, the price of older bonds that earn higher interest rises.
Investors have now in bond funds, a unique opportunity to collect quite high interest and also to earn from the growth of bond prices. 2024 should therefore be a very positive year for bond funds. The riskiest high-yield bonds have the greatest income potential, where the yield to maturity is still around 8% per year
Apartment prices have fallen, but only slightly
According to the Czech Statistical Office, apartment prices in the Czech Republic (realized prices) decreased by an average of 6% in the first three quarters. Data for the fourth quarter have not yet been released, but according to signals from real estate agencies, buyers are already returning to the market and prices have stopped falling. Prices of older, less energy-efficient apartments have fallen the most, often by up to 30%. In contrast, developers’ offer prices for new buildings fell by only 4% on average.
Table: apartment price trend in 2023 (as of September 30)
Evolution of apartment prices in 2023 (as of September 30) Prague −5.6% Czech Republic without Prague 6.1% All of the Czech Republic −6.0%
Two years ago I expected a much greater decline in apartment prices. But then the war began in Ukraine and half a million people who needed a place to live came to us. All the empty rental apartments were filled. While there has been a lack of buyers in the market over the past two years, there weren’t many sellers either. If it were not for the Ukrainians, the market would be flooded with empty rental apartments and prices would drop by 20-30%.
Thanks to falling mortgage rates and pent-up demand over the last couple of years I expect a significant recovery in the real estate market in 2024. Apartment prices have probably already hit bottom and will slowly rise again. However, we believe mortgage rates will remain elevated around 4-5% per year over the long term, so only serious buyers, not speculators, will return to the market. This should keep real estate price growth in check.
Trend in realized prices of apartments in the Czech Republic in the years 2005–2023.
Author: FINEZ Investment Management, sro
Real estate funds resisted the pressure
In 2023, real estate funds focused on residential and commercial properties faced rising yields and rising loan interest. Nonetheless, thanks to the increase in rents, real estate funds were able to record, in most cases, a solid appreciation of 5-8%.
The year 2024 is expected to be very favorable for real estate funds. And the following years too. Over the past two years, due to high inflation, rents of real estate funds have increased significantly on the income side, but at the same time on the expenditure side, interest on loans. While interest rates are expected to decline gradually, rents will already remain high.
Operating profits will therefore increase, and this will have a positive impact on the accounting valuation of the properties managed, which will have been keeping pace with inflation for some years now. The prospects for real estate funds for the coming years are therefore very good and should consistently beat inflation for several years.
The krona weakened slightly against the euro and strengthened against the dollar
With the expectation of a decline in interest rates in the Czech Republic, the koruna began to weaken against the euro since the summer, while the European Central Bank, however, continued to increase interest rates during the ‘summer. The interest differential between the krona and the euro progressively narrowed over the course of the year and the crown ceased to be so attractive to investors. As long as crown deposits (and bonds) yielded 6% per year and euros had virtually no interest, the crown was in high demand in Europe.
The further development of the Czech currency against the euro will largely depend on how synchronized central banks reduce interest rates. If the CNB lowers rates before the ECB, the interest rate differential will continue to decrease and the krona could continue to weaken above 25 crowns per euro. However, if the ECB starts cutting rates soon and kroner deposits maintain higher interest rates than euro deposits, the krona has the potential to strengthen below 24 kroner per euro again.
Trend of the EUR/CZK exchange rate.
Author: FINEZ Investment Management, sro
Energy is significantly cheaper
The price of most commodities listed on the stock exchange fell sharply last year. The price of oil fell by 8.5%. Thanks to this, fuel at petrol stations has also become cheaper. But most of all the price of electricity and gas on the stock exchange has fallen significantly Central European Power Exchange. Thanks to the lower cost of energy and fuel, inflation is also decreasing.
Table: raw material price trends in 2023
Table: Trend in raw material prices in 2023 Gold (USD/Oz) 2063 13% WTI Oil (USD/b) 72 −8% Electricity (EUR/MWh) 98 −55%
Unfortunately, the cheaper the energy itself is, the more prices for distribution and tariffs for RES have increased since January, so in the end we will not see a discount on bills. However, the silver lining is this Europe has managed to free itself from dependence on Russian resources and the energy crisis now seems averted, unless something extraordinary happens that threatens the supply of oil and gas to Europe again (e.g. the Gulf War, etc.)
Electricity price trends (EUR/MWh).
Author: FINEZ Investment Management, sro
Both gold and bitcoin have dropped significantly in price
The price of Bitcoin rose above $40,000 in December and for the full year 2023 the price of Bitcoin increased by 155%. The price of bitcoin increased mainly in anticipation of the approval of the first bitcoin ETFs on the US market. The price is also supported by the expected halving, which is expected to take place this April.
Table: price trend of precious metals and cryptocurrencies in 2023
Price performance of precious metals and cryptocurrencies in 2023 Gold (USD/Oz) 2063 13% Silver (USD/Oz 23.78 −1% Bitcoin (USD/BTC) 42,265,155%
Gold Price Will Rise 13% in 2023 Due to Inflation and Geopolitical Tensions to a new high. It even briefly rose above $2,100 an ounce in December. In contrast, the price of silver fell 6% in December, and by the end of the year it was more or less at the same level as a year ago.
Gold Price (USD/Oz)
Author: FINEZ Investment Management, sro
Land, private equity and other FKIs
I expect above-average appreciation for 2023 from funds focused on agricultural land, renewable energy sources, credits, loans and even some private equity funds. In contrast, many real estate and development funds are certain to report weaker economic results.
However, for most FKI funds we still know incomplete results in 10-11 months or three quarters of last year. The premium on 12/31 will be published only after the audits, i.e. usually in March/April. The specialized portal FKI-fondy.cz offers an overview and results of FKI funds for different purposes in the Czech Republic.
I’m looking at 2024 interesting potential for private equity funds. In this case, as in the case of real estate funds, a decline in interest rates will have a positive effect on valuations, both through cheaper loans, but also within the valuation models themselves when discounting future cash flows.
Disclaimer: The article and the information contained in it do not constitute an investment recommendation or an analysis of investment opportunities, nor do they constitute a public offer of investment instruments or any other offer or invitation to the public to carry out transactions in investment instruments investment. The data provided in the article comes from the materials of FINEZ Investment Management and is valid as of 12/31/2023, unless otherwise indicated.
