Uncharted waters on savings

Sherine Abdel-Razek , Sunday 15 May 2022

Experts explain how people with limited savings can weather the repercussions of higher inflation and a weaker pound to Al-Ahram Weekly.

Uncharted waters on savings
Individual investors lack the expertise to invest in the risky stock market


Runaway prices are the talk of the town, with recent Eid holiday gatherings seeing family members complaining about the jump in prices of everything across the board. TV talk shows have also been hosting experts to discuss ways to deal with the rising prices and hedge against the deterioration in the value of the pound.

Inflation has been rising over the past two years on the back of the Covid-19 pandemic. But since the war in Ukraine started, the rises have accelerated, particularly with the decision by the US Federal Reserve to increase interest rates for the first time in years.

Egypt’s inflation rate for April, released on Tuesday, came in at 13 per cent, its highest level since July 2019, compared to 10 per cent in March.

A main culprit behind the rising inflation is the Central Bank of Egypt’s (CBE) decision in the third week of March to devalue the pound by 14 per cent. This was followed immediately before the Eid by a second rate rise by the Federal Reserve, a move that strengthened the dollar further and weakened other currencies including the pound.

Many people are now worried both about the increases in the cost of living as well as the deterioration of the value of the local currency. They are also worried about their savings and investments. Uncertainty about the war in Ukraine has been adding to such worries.

At times of uncertainty, experts advise people to limit spending on unnecessary items and to look for less risky investments.

While the well-off can resort to professional managers to manage their portfolios or even afford to direct investments to real estate or gold, middle-class people, pensioners, and employees on fixed incomes and with limited savings are worried.

Unlike governments, which can diversify their investments in hard times, individual investors have limited options, said economic expert and Chairman of the Holding Company for Metallurgical Industries Medhat Nafei.

Nafei believes that the first priority of Egyptian families should be to follow an austerity budget by limiting unnecessary consumption and stopping buying durable goods or real estate unless there is extra money that will not be needed for the coming three years.

“If people can afford to allocate money for investments, they should be in risk-free instruments that can be easily liquidated without incurring heavy losses if cash is needed,” he recommended.

According to Nafei, it is advisable to invest in gold when the dollar increases in value as gold prices are indirectly proportional to the price of the dollar. However, at the moment gold prices are over the roof.

“As local demand for gold has surged since the beginning of the war, and with limits on imports in place, the low supply of gold has been translated to prices that are higher than those on the international markets. People should not rush to buy gold now, as while it might witness further increases, buying it at the moment is speculation,” Nafei said.

Gold prices have seen an upward trend since the beginning of the Covid-19 pandemic as investors resort to it as a safe haven against uncertainty in the markets. However, prices took a leap in the last couple of months after the government’s measures to limit imports limited supply in local markets.

However, Soha Mustafa, an engineer who recently inherited LE300,000 from her father, has opted to buy gold jewellery and bullion, nevertheless. “I don’t know anything about investing in the stock market, and the money I have is not enough to buy real estate. As for the investment certificates now being offered, I would lose a considerable sum if I decided to cash them in if I needed money urgently. This means I am left with gold,” she said.  

“It is true that I bought it at a price that is higher than it is now, but I will only lose if I sell it at a lower price. I plan to keep it until it increases by at least 20 per cent,” she told Al-Ahram Weekly.  

But the crowds in front of the banks since the recent introduction of the 18 per cent one-year investment certificates by Banque Misr and the National Bank of Egypt indicate that not everyone shares Mustafa’s opinion of the investment certificates.

The latest figures put the overall value of purchases of the certificates since their introduction six weeks ago at LE650 billion, said Amr Al-Alfi, head of research at Prime Securities.

According to Al-Alfi, the certificates are suitable for investors with no background in managing investments, such as pensioners. “They are risk-free with a high yield, and they are also short-term, so they make a perfect option,” he said.

Al-Alfi said that with the anticipated interest rate hikes by the CBE at its next meeting, more banks might offer similar investment certificates. “They won’t yield more than 18 per cent, but they could be in the range of 15-16 per cent for three years. Thus, people would have a wider range of risk-free high-yield investments to choose from,” he said.  

He said that investing in gold was on the rise as people could not access dollars. “The maximum you can buy through the banks after you submit documents proving that you need the greenbacks for travel or business is $10,000. So, people are resorting to gold even at higher prices. It is like buying dollars on the black market,” he commented.  

As for stock-market investments, experts recommend buying shares in large companies with steady cash flows and dividends as they tend to outperform more sensitive stocks in downturns.

Al-Alfi named shares in consumer goods companies like food industries, pharmaceuticals, and fertilisers, in addition to energy shares and electronic payment shares, as the demand for them is not affected by inflation. Bank shares also benefit from the hike in interest rates, he said.

However, he recommended individual investors to invest in investment funds rather than buying shares. “They diversify investments among different assets and thus limit risks,” he said, adding that the yield of money market funds, those investing mainly in treasury bills, can be 11 to 12 per cent.

Malek Sultan, an economic expert, believes that spending money smartly should be people’s main priority. “We have to spend money in the most efficient way by getting the highest benefit from each penny,” he said.

“People should look for places that give the option of getting points on higher purchases and download applications that grant points if they buy from members. These points can be cashed out or used for discounts later,” he said.

One application he had downloaded gives him a free haircut every four times he goes to the barber,” he said.

Sultan also advised people to look out for offers. “If you are paying your mobile bill through Fawry payment, for example, investigate if they offer any kind of discounts if you pay through them. Order from apps that give you discounts on your first order or on orders exceeding a certain value,” he recommended.  

Another important priority in the current situation is buying health insurance for family members because inflation can push up the price of medical services. “Buying good health insurance is as important as saving money,” Sultan said.

He advises consumers who urgently need durables to opt for a zero-interest rate on installments option as this will save them cash. However, they should only do this if they can afford the installments over a longer period, he said.

*A version of this article appears in print in the 12 May, 2022 edition of Al-Ahram Weekly.

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