Shares and in­ter­est rates go hand in hand

Don’t bank on this, but his­tor­i­cal data shows that de­clin­ing in­ter­est rate phases are par­tic­u­larly favourable en­vi­ron­ments for eq­uity in­vest­ments.

Finweek English Edition - - Market Place - By Schalk Louw

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many things in our daily lives go hand in hand, whether it’s sun­shine and sum­mer, tea and bis­cuits or Hashim Amla and cen­turies. When we take a closer look at our stock mar­ket and in­ter­est rates, we will note that even th­ese two go hand in hand.

On 20 July, the South African Re­serve Bank (SARB) an­nounced its de­ci­sion to, for the first time in five years, lower in­ter­est rates by 0.25 per­cent­age points. This de­ci­sion fol­lows af­ter lo­cal GDP showed nega­tive growth for two quar­ters in a row – some­thing that plunged us right back into a full-blown re­ces­sion. Although the in­ter­est rate cut may not be a huge sav­ing for the av­er­age South African con­sumer, the mes­sage that the SARB is try­ing to send is very pos­i­tive, namely it’s at­tempt­ing to stim­u­late growth.

How­ever, the ques­tion of how this will af­fect lo­cal shares now that we find our­selves in a de­clin­ing in­ter­est rate phase re­mains. In an at­tempt to an­swer this ques­tion, I would like to re­fer to the pe­riod since 1973 as an ex­am­ple (please note that his­tor­i­cal fig­ures do not guar­an­tee fu­ture per­for­mance in any way what­so­ever).

The pe­riod dur­ing which in­ter­est rates start to rise from a low up to where they start to drop again, is called a ris­ing in­ter­est rate phase. When in­ter­est rates drop from a high to a low, the pe­riod up to the point where they start to rise again is known as a de­clin­ing in­ter­est rate phase. What’s in­ter­est­ing about this 44-year pe­riod is that in­ter­est rates rose 48% of the time and de­clined 52% of the time, which nearly gives us a 50/50 sce­nario.

Even more in­ter­est­ing is the du­ra­tion of each of th­ese phases. Each one didn’t last only for a month or two – an av­er­age ris­ing phase lasted 34 months over this pe­riod, while an av­er­age de­clin­ing phase lasted 32 months over the same pe­riod.

When we take a look at our stock mar­ket over the same pe­riod, it is quite strik­ing that we have never ex­pe­ri­enced a nega­tive mar­ket in a de­clin­ing in­ter­est rate phase since 1973. Quite to the con­trary, the mar­ket flour­ished.

The av­er­age an­nual growth dur­ing a de­clin­ing in­ter­est rate phase over this pe­riod was a whop­ping 34%, while you would only have earned around 0.9% an­nual growth in a ris­ing in­ter­est rate phase. Look­ing at the per­for­mance over the var­i­ous pe­ri­ods, it is clear that you would have out­per­formed the money mar­ket in ev­ery de­clin­ing phase, while you wouldn’t have been able to out­per­form the money mar­ket in a ris­ing phase.

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