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The main investor is an individual!

The main investor is an individual!

InfoMarket comments

The question of how to preserve and multiply their money rises not only by the large investors, on the contrary: most of them are just people that do not consider themselves the investors, but simply collect money on the major purchases, vacation, wedding...

Most people believe that to keep money in the house is not only unsafe, but also stupid; every year, the money loses their value - first of all, their value decreased due to the inflation.

There are many ways to preserve and increase capital - risk and high profitability or, in general, without risk, but with very low yield. Not all the methods, which are widely used in the developed countries, can work in Moldova. But to understand what should be the minimum yield of savings, you must pay attention to the level of inflation. Not to delve into the stats will take a three-year period in which the investment environment is called mid term: the period from November 2011 to October 2014.

Inflation

Annualized inflation in October 2012 amounted to 3.9%; in October 2013-4.7%; the October index for the current year is not yet, in September 2014 (for the last 12 months.) inflation made  4.8% p.a.

Inflation in the annual terms (12 months)

November 2011 - October 2012

3.9%

November 2012 - October 2013

4.7%

October 2013 - September 2014

4.8%


Thus, over the past three years, the annual yield of investments, with the aim of preserving their purchasing power should not be less than the maximum registered inflation, to increase and surpass it. That is, the yield of investments in the national currency should be from 5% per year.

The tools which provided this yield for the last three years:

Deposits

Deposits in commercial banks is probably the easiest and most affordable way to save and make money. Conditions of placing deposits for legal entities is always worse than attracting money from individuals, so we will consider the average rate on deposits for individuals.

Dynamics of average interest rates on deposits of individuals by months (November 2011 - September 2014).
 

In 2011, the maximum average rate on deposits amounted to 10.15% p.a. in September. At the end of 2012, the average rate tried to return to the border of 10%, but since the beginning of 2013, the rate began to decline and does not exceed 8% p.a.

However, this level ensures not only the safety of funds from inflation, but their multiplication. The only question is that the banks that have problems with capital are raising the rates - the higher the rates are, the bigger the risks. In the history of the Moldovan banking system were many cases, when investors lost their money. The deposit guarantee Fund guarantees the return of up to 6,000 lei on one deposit. However, the Parliament adopted a law increasing the minimum amount of the guarantee up to 15 thousand lei, but only in the first reading.

State securities.

It is a very reliable tool of investing but it is not very popular among legal entities and almost not used by individuals. It is mainly used by commercial banks, by investing free money in securities receiving a guaranteed interest rate.

Dynamics of average interest rates on GS (October 2011 - October 2014).


Only in one period May - July 2013 the average interest rates on state securities were below inflation. This is due to the high demand from the commercial banks: they prefer to invest available funds in the guaranteed instrument with a guaranteed rate of return; and the higher the demand is the lower is the rate. On the other hand, the Ministry is monitoring the situation and almost every year increases the volume of GS, providing revenues to the budget from the sale of securities. So this year taking into account 430 million lei, which were supposed to cover the deficit from the sale of GS was observed an increased demand for securities, and the Ministry of Finance has submitted a proposal to amend the budget and doubling this figure to 800 million lei. The market got more securities, the budget- more money and the national Bank sterilization of money supply and the reduction of pressure on the currency market, and the rates have increased.

In general, state securities are a very attractive tool for investment, providing banks as major players with the guaranteed profit. In addition, this year the Ministry of Finance started issuing treasury bills with a maturity of three years at a fixed rate: in April it made 8% p.a., in September it made 8.75% p.a. which is much higher than the inflation rate.

Shares

In economically developed countries, private investors actively participate in games at the stock market, buying and selling shares. However, the specifics of the Stock market of Moldova are that shareholders prefer to concentrate their stakes and do not consider the dynamics of stock prices as a tool of making money. There are no such shares which would cause the interest for venture capital investments at our market.

By the way, the investments in the investment funds, trust companies, pension funds are highly developed all over the world, but in Moldova reputation of these organizations was strongly impaired and the legislation is not yet ready for normal operation of such organizations. So this segment in Moldova has yet to develop – we hope that it will happen in nearest future

Real estate.

Many believe that the best investment shall be done in the real estate. Despite the fact that the problem of housing always exists in society, apartments and houses are always bought, sold and leased.

According to the market operators, the cost of 1-bedroom apartments - the least expensive housing, and therefore most popular - is about 600 euros per 1 square meter, both in primary and secondary housing. Moreover, the cost of the apartments in the last three years, slightly declined in aggregate, but remained virtually unchanged in relation to one-bedroom apartments. The minimum cost of one-room apartment is about 20 thousand euros. Given the stagnation of the market, as well as a growing number of houses under construction, the forecasts for the nearest future, as well as three years ago, show stagnation – housing is not getting expensive and is not getting cheaper. At the same time the construction materials are getting expensive- 10-30% per year; and this is associated with devaluation of the national currency.

Despite the fact that the rent of 1-room apartments is on average 100 euros per month, the net return on the investments in this housing- it is necessary to invest minimum 20 thousand euros - will account for almost 17 years. But we're not talking about payback, but about preserving money and in this regard, the real estate is reliable tool for conservation, subject to market dynamics - up or down - in any case is protected against currency risks.

Although there is business based on the purchase of housing in poor condition, repair and bring up to the so-called European standards with the aim of further sales. But this business requires constant participation and employment.

That is, investing in property can hardly be regarded as medium-term investments. Real estate is invested by those who do not seek to obtain profitability, even with minimum risk; preferring to guarantee the safety of their funds; and when renting the property the owner minimizes operational costs for its maintenance.

Precious metals

Many believe that one of the most reliable investments is the purchase of precious metals - gold and silver. Indeed, during periods of transition, when raging hyperinflation or war, investments in precious metals ensures the preservation of capital. But when the world economy is in crisis, gold, silver, platinum decreased in price.

If the investments in gold have been carried out three years ago, by the end of this year, the investor would face big losses.

Dynamics of prices for gold MDL for 1 gr. according to the NBM quotes (November 2011 - November 2014).


The higher price of a gram of gold was registered in early October 2012, but then followed by a sharp decline, reaching bottom in July 2013. In recent years, the gold does not show stability: from the highest points to date, it fell by 21%.

Dynamics of prices for silver in MDL for 1 gr. according to the NBM quotes (November 2011 - November 2014).

 

As for the silver its maximum value was registered in March 2012, and the lowest – on June 30, 2013. Depreciation of silver since the peak position to date was 55%.

These calculations are presented in lei. As from November 2011 to November 2014 MDL depreciated by 27% (from 11,6784 to 14,8327) - that is, de-facto loss from investments in gold is equivalent in currency for the last three years at 48%; and in - 82%, respectively.

Thus, precious metals, and real estate, can be attributed to the profitable investment of capital, but in the long term and only for the purpose of saving money, they can not be multiplied.

Those who three years ago have bought property or invest in the precious metals today are not able to return the money because their purchases were made at the price peak. During the decline investments are profitable in real estate and precious metals and then it may be the most suitable period for the investments for preservation of these assets.

It should be noted that 2011-2014 were the years of fall of prices for precious metals. Until then, gold has increased in price from December 2008 to June 2011 by 70% and investors for over 12 years were in a “quiet harbor”.

Artwork.

There is a world practice to invest in the artworks. But, on the one hand it is a rather long-term investment; on the other hand, Moldovan gallery business is practically undeveloped. Its development depends largely on how Moldovan artists are recognized at the global level; and how our entrepreneurs are ready to understand it and to invest money in this field.

Many prefer to invest in foreign currency - euro and dollar. But we must understand that in the US and Euro zone exist own inflation - the purchasing power of currency. US inflation in recent years is 1.5-2%, in Euro zone - inflation is lower-from 0.5% to 1.5% expected in 2016. Thus, the average rate on deposits in foreign currency in Moldova in recent years ranges from 3.64% - to 4.79% p.a. That is, at a very rough calculation, when the value of deposits in MDL is approximately 8% minus inflation of 5% gives a net return of 3% p.a. When the value of currency deposits is 4.5% minus inflation 1.5% it will give annual net return of 3% p.a.

However, the devaluation of leu for three years made 27%, which can be roughly estimated as 9% p.a. So the income was received by those who three years ago invested in currency. And if this money was still on the deposit, the profitability would have been an average 10% p.a. which is twice the average of the annual leis inflation.

It turns out that devaluation of leu increases the attractiveness of the currency deposits, but it is a topic for a separate discussion.

Speaking about the medium-term investment, it may also be noted the desire of many to participate in the ownership of such business like to invest in friends, just in people you can trust. But this is very risky and troublesome matter: as it said: “If you want to lose a friend, lend him money; on the other - the main law of business sounds like "Protect your investment".

But even individuals, which invested their money, without knowing it, become investors and how investors may be sure that their investments will not be lost: to monitor the financial position of the bank, to monitor trends at the real estate markets, market of precious metals; to monitor the dynamics of currency rates, etc.

The results are that the medium-term investments of private investors - those who want to save their money and increase, the most simple and obvious way is bank deposit.  So the choice is rather limited.