Comparative analysis of equity market sectors as savings options in times of inflation: Spotlight on the service sector

Details

Supervisors

Monti, Francesca

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

Since 2021, inflation has become a major concern for Europeans as rising prices lead to a reduction in purchasing power. While only Belgium and Luxembourg allow automatic wage indexation based on inflation in the Euro Area, savings can be seen as a good alternative to protect against this loss. The document first examines the behavior of savers. Factors such as observed and expected inflation, interest rates, and income changes all impact the savings rate. Additionally, the uncertain nature of crises tends to push the savings rate higher. Periods of high inflation also lead to an increase in central bank interest rates. Thishas the effect of increasing the income from savings accounts, but usually not enough to offset the rise in prices. Real assets such as stocks could be a viable alternative, but rising rates can result in downward revisions of future cash flows and a decline in stock markets. Moreover, companies may face higher costs due to rising input prices, and it is not certain whether selling prices can compensate for these costs. The results show that while inflation does not have a positive impact on the stock market, it still tends to outperform the inflation index. The energy sector appears to be positively impacted by the recent period of high inflation. In contrast, the services sector seems to have a higher probability of positive returns when inflation is increasing, but at lower levels. Finally, the financial sector provides good protection against inflation as a period of high inflation is often accompanied by higher interest rates.