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Do interest rates affect equity pricing?

Goola Warden
Goola Warden6/2/2022 06:54 PM GMT+08  • 4 min read
Do interest rates affect equity pricing?
Rising interest rates are likely to pressure growth stocks but provide a lift for local banks
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The answer — in a word — is “yes”. As part of the discussion during The Edge Singapore‘s Mid-Year Investment Forum, attendees asked about the impact of higher interest rates on the stock market. Paul Ho, senior director, Asia Pacific equities, at UOB Asset Management, pointed out that higher interest rates mean lower valuations for growth companies.

“So, if inflation is rising and interest rates are going higher from here, then you should expect a lot of pressure on these stocks. The mathematics behind it is because interest rates are used as [proxy for] discount rates. So, if discount rates go up, the value drops,” he explains.

Let’s dissect that a bit. When money is easy, interest rates are low, policy rates are near zero, and quantitative easing is in full swing, most assets rise, including equities, bonds and apparently cryptocurrencies.

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