The financial crises of recent years, from the subprime mortgage crisis to the COVID-19 pandemic, have highlighted the vulnerabilities of the economic system and the need to adapt in the face of major disruptions. To regulate economic overheating or slowdowns, central banks will raise or lower key interest rates. These actions will trigger either an increase (Quantitative Easing) or a decrease (Quantitative Tightening) in the money supply available in the economy.
The longer-term consequences of these measures, such as inflation, underscore the limits of government and central bank interventions as sustainable solutions.
Faced with a still uncertain situation, what approach should be adopted?
2023: The inflationary crisis
Inflation is a general and sustained increase in prices. Inflation rose sharply in 2022, reaching levels unseen in many decades.
On one hand, the post-COVID period in France was marked by a significant accumulation of household savings, which were injected into the economy to support the recovery, driving an increase in demand. During the pandemic, households were forced to curtail their spending, leading them to accumulate substantial savings, estimated at approximately €175 billion in 2021. These savings were released as the economic recovery took hold, fueling a surge in demand.
On the other hand, geopolitical tensions and international conflicts disrupted global supply chains, particularly for commodities. The war in Ukraine had a significant impact on energy prices, notably gas, oil, and wheat. These price increases directly affected companies, whose production costs rose sharply. Health-related restrictions also constrained production capacity, leading to a contraction in supply.
This combination of rising demand and falling supply explains the emergence of inflation.
At the same time, corporate insolvencies have been rising continuously. In their latest release, the Banque of France reported that the number of companies in insolvency proceedings reached 49,863 at the end of July, an increase of 1.3% compared to the cumulative figure for the previous twelve months.
To combat inflation, the ECB (European Central Bank) began a policy of interest rate hikes in July 2022, bringing the deposit rate to 3.75% today. By comparison, one year ago (July 2022), that same deposit rate stood at 0.00%.
This uncertainty surrounding inflation has led investors to demand a higher risk premium to invest in long-term bonds. Indeed, investors are less inclined to invest in long-term bonds when inflation is high, as they fear incurring capital losses.
This rise in long-term interest rates could therefore have a negative impact on economic growth, as it becomes more costly for companies to borrow, thereby reducing their profitability and capacity to invest.
What are the opportunities and how can they be optimized?
During this period of declining economic activity, there are several ways to invest and secure returns on investments.
Various cash investment strategies are being observed among companies for their excess cash.
Short-term, on maturities of up to 2 years, floating-rate investments make it possible to maximize the level of return by taking advantage of increases in interbank rates (€STR, Euribor). Money market funds are also regaining interest among investors, who benefit from daily liquidity on these instruments.
For a more stable cash position, now is the opportune moment to lock in a fixed rate over a longer maturity. While there is limited visibility on the trajectory of inflation and the consequences of the ECB’s monetary policy, analysts are anticipating a return of inflation to 2% by 2025 at the latest. ECB rates are therefore expected to gradually decline. This is why we recommend positioning in long-term fixed-rate investments.
For a more dynamic cash management approach, the rise in rates is restoring the attractiveness of structured products. Indeed, the high-interest rate environment enables banks to guarantee capital over shorter maturities and offer high coupon levels. Banks are now able to guarantee fixed returns, even in the event of a market downturn.
