How have interest rate hikes affected equity investments?
How have interest rate hikes affected equity investments?
The Fed had been increasing the interest rates continuously in the past to control inflation. What were the implications of this on the company’s performance?
To put it in simple words, when interest rates went up, the future earnings growth went down for companies. The most affected companies were the ones having higher portion of debt in their capital structure. The interest rate hikes lead to higher interest expenses and operating expenses which ultimately resulted in a lower net income and EPS. However, not all companies underwent the same scenario. There were companies who managed their expenses well, delivered better performances compared to the ones that had no futuristic view.
How?were equity investments?affected?due?to?this?
As?a?result?of?the above?discussion,?the?equity?investment?returns?were?less appealing?to?investors compared to?bonds?which?generated?higher returns and?low risk. Some?of?the?companies?failed?to attract?the?investors. This pushed?the investors?to?exit?their?position?in?equity?investments.?The?prices were going?down?despite?the?company’s?better?performance?as?the?sentiments?in?the?markets?were negative?due?to?the?uncertainty?about?the?future performance?of?the companies?leading?to?an uncertain macro?environment.
I?still?see,?a?cautious?behavior?of?investors?till?Fed?stops?increasing?rates?and?there?is?more?liquidity?in?the?market.?I?expect?this?scenario?to?continue?in?the upcoming?quarters.?Also,?see?investors?holding?on?cash?instead?of?investing?in low-risk?low?return?scenario?as?well.
Happy?Investing!
- Harvind Viswanath Crispidea- Research Analyst