Faith Glasgow, AIC Compass Magazine, October 2023:
Interest rate rises took a breather in September, as the Bank of England narrowly opted to keep the base rate at 5.25% for a second month on the back of a further decline in inflation in August. It was the first break in the UK’s rising rate cycle since December 2021, and the hope is that we may finally have seen the worst of painful hikes in borrowing costs.
That’s a big deal for the many investment company sectors that are particularly sensitive to interest rates, including UK smaller companies, private equity, technology, growth capital and alternative assets such as infrastructure and renewable energy.
As Matthew Read, senior analyst at QuotedData, explains, the impact can be both direct and indirect. “The effects of higher rates on equity markets are numerous, not least because now, faced with a realistic alternative, some investors have been pulling money out of equities in favour of fixed income, which now offers the best rates of return since the financial crisis. Not surprisingly, longer-duration assets and the funds invested in them have suffered the most.”
Of course, a plateau in rates is not the same as a decline, but as Stifel head of research Iain Scouller says in a recent note, markets are interested in what happens next…
Different sectors are likely to feel the benefit of declining rates in different ways. Price performance for some, such as infrastructure and renewables, is negatively correlated with gilt yields and so could be enhanced as the latter fall.
Meanwhile, growth stocks (which tend to have a significant chunk of their value discounted from some point in the future) have been hit hard, affecting funds with investments in technology as well as the growth capital sector. Similarly, many private assets have struggled.
Read more here