In investor watch I discuss how to make Money for starters. The concept is to continuously explore your options in the capital market. I will attempt to explain the mechanisms of the capital market. Moreover, I will also do an empirical risk benefit analysis of each of the discussed topics.
Introduction
Let’s assume you have spare money that you want to save, where are you gonna put it? On the bank? Interest rates are next to nothing due to the European Central bank charging negative interest rates on depositing capital. What about stocks? Stocks are highly volatile due to the increasing trade war between the US and China. So, where should you as a student put your money as risk free as possible in order to afford some extra beers? The answer is government issued bonds. Government bonds are the way of governments of borrowing money from the private capital market from both inside and outside the country. Bonds offer coupon payments with varying interest rates depending on the country and the maturity date as return on your investment. While traditional western countries have low or even negative interest rates, emerging economies often have high undervalued government bonds with a high interest rate. The higher the interest rate, the more risk is associated with the purchasing the bond.
Risk Benefit Analysis of Government Bonds:
The benefits are that most bonds are state guaranteed, so your money is safe. Moreover, coupon payments are made quarterly, so you always have a steady flow of income. Additional benefits might arise at the maturity date if the currency of the bond has strengthened in value therefore increasing your profit.
The risk is that some countries can default, or that you won’t be profitable due to (hyper)inflation, a change in fiscal policy or a change in the country’s government. So what countries should you invest in with your spare money?
#1: Ukraine
This country has seen plenty of mixed news reporting, but financially I believe it is a golden opportunity to (potentially) make a lot of money. The advantages of investing in Ukrainian government bonds are multiple. Ukraine offers two Goverment bond types: Eurobonds (Bonds that are offered in the Euro currency and that have a lower interest rate due to a lower risk of inflation compared the the Hryvnia) and Domestic Bonds in Ukrainian Hryvnia.
Domestic Government Bond Advantages
The reasons to invest in Ukraine are multiple. Generally speaking, Ukraine has a lot of potential factors that make it worth investing in. Ukraine has a population of almost 45 million people and is the world’s largest grain producer. The land market that produces the grain, however, remains locked till this day hurting exports and growth potential. However, this is soon to change with the new government pledging to unlock the land market. According to the world bank, this can lead to ‘up to two percent of extra growth’ Year-over-Year (YoY). Moreover, it also has a diverse industry ranging from a thriving IT sector, lots of heavy industry to a dedicated space program.
Reasons to invest in Domestic Government Bonds
First is the currency effect. The Ukranian Hryvnia is continue to strengthen against the US dollar advancing steadily. Therefore, the benefit when buying a government bond is not only the high interest rate, which will be touched upon as the second advantage, but also a positive net currency effect, making your investment worth even more over longer periods of time.
Second is the insanely high interest rate of 15.5% on domestic bonds. Normally, a high interest rates relates to low invest confidence or a high inflation. However, interest rates on domestic Ukrainian government bonds is declining from 18.5% to 15.5% combined with a record with foreign investors owning over 12%.
Reasons to invest in Eurobonds
Not looking to take the potential currency hits? Ukraine also offers Eurobonds with an interest rate of 6.75%, which can be bought on foreign markets, which is a lot better than the current interest on your bank account.
Risk analysis
The growing confidence shows in the Ukrainian market with Fitch upgrading Ukraines credit rating from “B-” to “B” signalling a safe outlook. A high credit rating reflects a high change of repayment of government bonds. Moreover, the Ukrainian government is rapidly reforming the country making it more competitive while curbing corruption.
Risks are that the government fails in delivering necessary reforms and caves to the interest the corrupt reversing any made progress. At the time of writing, Ukraines is still awaiting a vital IMF loan as part of a support program. If the IMF denies the loan, interest rates and inflation will increase and therefore risk will increase if a domestic bond is purchased.
If you are interested in how to buy ukrainian government bonds a link is provided below
LINK: https://mof.gov.ua/en/ovdp
#2 Iceland
Iceland is a small country that is often forgotten in the mind of investors, yet as of recently the central bank of Iceland allowed the Icelandic Krona (IRK) to be used as stable E-money, an alternative to crypto valuta. Similar to crypto valuta, E money also utilizes blockchain technology and is issued in tokens which represent a certain value. Different from crypto valuta however, is that “E-money is regulated and redeemable on demand (decrypt, 2019). And it just so happens to be that the Icelandic Krona is the first European currency in which you can redeem your E-money.
Risk Analysis
Iceland has an A3 rating with a positive outlook, so your money is assured to be safe. The central bank of Iceland offers government bonds of 3.37% to 3.417% depending on the maturity date. Be warned that you do have to take into account that the IRK can inflate compared to the Euro.
Link: http://www.bonds.is/
#3 The United Kingdom
Are you risk taking in buying a gilt (the UK’s name for a bond)? Then the United Kingdom offers a stellar opportunity after BREXIT. The United Kingdom has a strong economy and a strong currency, the British pound. The UK has an excellent AA2 credit rating, signalling a strong commitment to paying off government bonds. However, with the pending BREXIT and especially an unlikely no-deal BREXIT (at the time of writing) might signal uncertainty and trouble for the UK treasury to borrow money from the capital market due to increased investor uncertainty. This will spike interest rates on government bonds, or at least temporarily in order to attract much needed capital. A cunning investor will buy these bonds in these troubling time hoping for the shock to be only temporary and that when the economy has recovered the bond will have more value than it was bought for. Moreover, if BREXIT turns out to be a success story, you can always sell your bonds prematurely against a price premium to other investors.
Risk analysis
While the UK has an excellent AA2 rating at the time of writing, this rating might decrease, increasing uncertainty. However, I do not think the British state will default due to a strong economic policy and strong financial institution. The highest risk is in currency effect. The Pound Sterling might inflate significantly after Brexit for an extended period of time before being stable. Therefore I would not invest in short term or medium term bonds. Moreover, The British Central Bank can now inflate the currency more liberally so there is no guarantee that the amount of pounds you get are worth the same amount of Euros tomorrow.
Link: https://www.dmo.gov.uk/responsibilities/gilt-market/buying-selling/
Happy Investing!
Disclosure:
This guide does not offer guaranteed success and we do not accept any liability. I do not have any private interest in promoting any of these bonds.
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