Wednesday, 19 November 2014

How interest rate affects the market - a mathematical courtship

What would happen when the banks increase their interest rate? Here's a very simple summary.


- People will park more money in the bank (risk-free). Therefore stock prices might decline, especially for stocks of higher risk eg small caps, REITs.


- REITS may be adversely affected due to the increase in their debt's interest. REITs depend on loans to fuel their property business. That's why we always talk NAV and gearing when we look at REITs. On the bright side for stock pickers, REIT yield would then increase if their share prices drop.


- Bond prices would decrease, because again more people would choose to park money in the bank (which is supposedly risk-free). Bond yields of new bonds issued would increase to compete as a result.


In view of the highly possible increase of bank interest rate in the near future, what would be your course of actions? Welcome to share your thoughts.

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