00:00 Interest rates are currently at all-time highs,
00:02 as central banks like the Bank of England,
00:04 the US Federal Reserve, and the European Central Bank
00:07 aim to bring inflation back down to their targets.
00:11 However, there are fears that interest rates
00:13 will stay higher for longer,
00:14 as stubborn inflation takes its time to ease.
00:18 Now, in general, interest rates and the stock market
00:20 have an inverse relationship.
00:22 When interest rates rise, share prices fall,
00:25 and the return available from lower-risk asset classes,
00:28 such as cash and bonds, they become more attractive.
00:31 Because interest rates have remained high for a while now,
00:35 the yield on government bonds,
00:37 they're also refusing to go down,
00:39 which in turn puts pressure on share prices.
00:42 Equities are being challenged
00:44 because investors can instead choose certain UK GILTS
00:47 or US Treasuries and invest in bonds
00:50 that pay more attractive yields
00:52 rather than investing in stocks.
00:54 Now, this is just one of the various ways
00:56 that interest rates can affect stock markets.
00:59 Government bond yields are currently rising,
01:01 as central banks, they back away
01:04 from looser monetary policy,
01:06 and that's taking its toll on shares.
01:08 10-year government bond yields
01:10 are seen as the risk-free rate,
01:12 and any other investment should return more than that
01:15 to compensate for the additional risks.
01:17 Now, the higher the risk-free rate yield goes,
01:20 the less inclined or obliged investors may feel
01:22 to take risk and pay up further asset classes,
01:25 such as shares.
01:26 The 4.27% yield on UK 10-year GILTS
01:31 is the highest since last November,
01:32 and the paper is pushing towards the 4.5% mark
01:36 for only the third time since the financial crisis of 2008.
01:40 Meanwhile, the US 10-year Treasury yield
01:42 is moving back towards the 5% mark,
01:44 a figure only once reached since 2007,
01:48 and that was last October
01:49 when financial markets were running scared of inflation.
01:53 Now, higher rates can also put pressure on stock valuations,
01:56 as corporations may need to generate
01:58 more attractive earnings to capture investor interest.
02:02 Another way the interest rate environment affects stocks
02:05 has to do with a company's bottom line.
02:08 Many firms borrow for the short term
02:10 with debt that resets each quarter.
02:13 Now, the interest on these loans is based on a rate index
02:16 that mimics changes set by central banks.
02:20 So if a debt-issuing company faces higher borrowing costs
02:23 due to rising rates,
02:25 it may result in reduced company growth and reduced profits,
02:28 which can then be reflected in lower stock prices.
02:32 Lastly, interest rates also affect
02:34 the way future cash flows are valued.
02:36 Future cash flows are discounted back
02:38 based on existing interest rates.
02:40 With higher interest rates, future earnings are worthless,
02:44 and therefore, evaluations will be lower,
02:46 and this creates a drag on the stock market
02:49 while they adjust.
02:50 With this said, however,
02:52 there will be some companies that still benefit
02:54 from higher interest rates,
02:55 and we've seen that at the moment with banks, for example,
02:58 and they benefit due to being able to lend at higher rates.
03:02 (air whooshing)
03:05 [BLANK_AUDIO]
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