When we purchase financial assets, we are more interested in how fast that asset will appreciate and provide a substantial return on capital. Unfortunately, most people are usually oblivious of the factors that could affect the prices and subsequently the values of the assets.
An asset is any resource (tangible or intangible) owned/controlled by an individual or by a business which is expected to produce positive economic value. In this article, an asset will be classified as financial – Fixed Income Securities, Stocks, and Real Estate.
Understanding the factors that could affect the value of an asset is key, as it will guide you to make smart decisions as to when or when not to purchase an asset or how to insulate yourself from financial disaster when the value of your asset starts to implode.
Below are two key factors that affect the value of your financial assets;
- Inflation: Inflation, which is defined as a general increase in prices and fall in the purchasing value of money, can affect the value of your asset. In an inflationary period, the value of real assets like real estate, commodities, etc tends to keep up with inflation.
Values of monetary assets like cash, short-term Government and corporate bonds will also tend to keep up with inflation provided that any increase in inflation is matched by an equal increase in nominal interest rates
The values of longer-term fixed interest rate Government and corporate bonds will tend to be undermined by inflation because the fixed interest rate for the duration of the term becomes increasingly less adequate as inflation moves higher.
Higher rate of inflation causes individuals and businesses to hold fewer liquid assets, hence supply will exceed demand which will cause the prices to fall.
Financial assets under the fixed income category (such as bonds) will lose value if future inflation is higher. This is because the coupon payment rate is constant till maturity and thus, future cash flow will buy lesser goods and services in rising inflation.
In an inflationary period, the prices/value of Real Estate will be affected. There are lots of building materials that go into building a house. Therefore, when the prices of these basic materials go up, it will cost more money which will leave no option for construction companies to charge more.
With rising inflation, input prices are higher, consumers can purchase fewer goods, revenues and profits decline, and the economy slows down. All these ultimately lead to lower stock prices.
- Rising economic growth: Economic growth is defined as the increase in the production of goods and services over a specific period will affect the prices of assets.
Periods of rising economic growth will create more profit for businesses because consumers have more money to buy additional products and services which will increase company revenues and influence stock prices.
Bonds issued by the Federal Government of Nigeria can be affected by rising economic growth because the demand for money will be higher, higher demand for money will drive up costs and ultimately interest rates.
When short-term interest rates are expected to go up, longer-term interest rates typically follow. The impact of all this on bonds is that yields will be higher along with prices since prices and yields move in opposite directions.
During a period of rising economic growth with GDP on the rise, more people have jobs and salaries increase which gives rise to a greater demand for housing.
Economic theory postulates that when the demand for homes rises, the price will rise as well. This period represents a good time for property owners who have bought low to reap the benefits and sell at a high price.
Buyers of property who have money to buy a property can purchase, as long as they are willing to sell.