![]() ![]() Quality companies, be they growth or value, tend to come out the other side intact. It’s important to keep a level head and remember time is your greatest asset. Interest rate and economic cycles are part and parcel of investing. All else being equal, that’s bad news for growth companies. If rates rise, the value of those future cash flows decreases. That’s why the price-to-earnings (PE) ratio, looking say just one year ahead, tends to be higher. This impacts growth companies more than others because investors are willing to pay a lot today for slim near-term profits, or even losses, on the assumption that earnings will come further into the future. As rates rise, those future flows start to be worth less in today’s world. When rates are low, future cash flows are worth more today. £100 in ten years would be worth £64.39 if rates rise to 4.5%. How much more depends on the discount you receive for paying now, alongside the many other factors that go into business performance.Īssuming everything else is constant, £100 in ten years is worth £70.89 today if interest rates are 3.5%. Presumably, you’re expecting to get more than you’ve put in – though that’s never guaranteed. When you buy a share, you’re paying now for money you hope to receive later. One way to value stocks is to look at the cash investors expect them to generate in the future, and discount those values back to the present day. Ratios and figures shouldn’t be looked at in isolation, it’s important to consider the bigger picture. All investments and any income they produce can fall as well as rise in value, so you could make a loss. This article isn’t personal advice, if you’re not sure whether an investment is right for you, seek advice. Some sectors are more insulated than others and some companies are better prepared to cope. ![]() This can have knock-on effects on company profits and ultimately returns. Plus, things like mortgages and credit card debt become more expensive, so people with debt have less to spend. If your savings at the bank are making a reasonable return, it becomes harder to justify the extra risks that come with investing. When rates rise, it should, in theory, make cash savings more attractive. Generally speaking, interest rates and stocks tend to move in opposite directions. ![]()
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