The high global interest rates do not always impact stock prices negatively, but bond prices are affected more significantly than stocks and other assets. Some sectors may benefit more from rising global interest rates than others. International investors can hedge their portfolios by considering these trends.
Interest Rates and Stock Prices
Interest rates can simply be thought of as the cost of using someone else’s money. As central banks print money, they can influence these rates by increasing or decreasing the amount they charge other banks to access funds. These changes affect the entire economy as these higher costs are passed on to companies and then to consumers. In fact, interest rates are the primary tool used by those in power to create monetary policy today.
How Do Interest Rates Affect Discount Rates?
Interest rates also impact stock valuations by changing the discount rate. If the value of stocks is equal to the value of all future earnings in present dollars, you must apply a discount rate that reflects the prevailing interest rate over the entire period. A rise in interest rates means that a company’s stock is worth less today compared to times when rates were lower. In theory, this will reduce stock valuations and market price at the time of increasing interest rates.
How Do Interest Rates Affect Sectors?
Some sectors may thrive from rising interest rates, while others may suffer more than others. For example, the financial sector tends to receive a boost when rates rise, as banks can charge more for lending money. Higher rates lead to increased mortgage rates, resulting in a higher net interest margin for banks. However, companies that manufacture products or engage in global retail often suffer when interest rates rise, as higher rates mean that the U.S. dollar is stronger and the price of U.S. goods increases in other countries. They may not be able to compete with local products or lower-priced items that are not linked to the U.S. dollar.
How Do Interest Rates Affect Bond Prices?
Rising interest rates lead to falling bond prices and increasing bond yields, and vice versa when rates fall. However, not all bonds are the same. Fixed-rate bonds, for example, tend to decrease in value when interest rates rise. Long-term bond prices tend to fluctuate more with interest rates, while short-term bond prices tend to remain more stable. This is because there is less risk in holding a short-term bond until maturity, and thus changes in interest rates may not have as significant an impact as they do in long-term bonds, where there is a greater opportunity for prices to change significantly by the time the bond matures. It is helpful to think of the effect of interest rates on bond prices in terms of the risk you are willing to take: high rates are likely to last for a long time, leading to opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity after opportunity.
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