Interest rate effect on stocks and shares.

eskbanker

snookerloopy96 said:
Not totally what I'm implying but its a little along those lines, or at least it might be if the interest rates really did bottom out.

snookerloopy96 said:
In my 50s...

Current base rate: 3.75%

Base rate for over 13 years from March 2009 to May 2022: below 1%

What did you do then?

tigerspill

snookerloopy96 said:

tigerspill said:

snookerloopy96 said:

El_Torro said:

Generally speaking a low interest rate environment is more conducive to growth in stocks and shares. On a very basic level if investors are getting a decent interest rate in cash why would they take the risk of investing in stocks and shares? Also companies benefit from low interest rates as they can borrow money cheaply and have more potential to grow. 

Arguably we've been in a low interest rate environment since 2008, with a small Covid related blip. Some investors might be surprised by what happens to their investments if we ever go back to an extended period of high interest rates. 

Having said all that interest rates are only part of a complex story. The correlation is not 100%. 

I agree about us being in a low interest environment for a while now. A lot of media or online things make 5% and 6% being 'high' when really they're not, certainly historically at least.

Thanks for the reply, the only reason I may look further into it is if rates continue to drop. I was reading back through these posts and a few years ago some savers were under 2% (?), if it got to that point again the stocks/shares option becomes more and more appealing.

That (using interest rates) isnt necessarily the best thought process.  Savings and Investments are different things with different objectives.  It isnt an either / or situation and you use each for different reasons.  Investments are generally a long term thing - 10+ years, and savings are often a short term thing where you need fairly fast access (e.g. emergency money or money you know you will need soon).  So the choice should really be based on your financial strategy.   Then there are bonds and Gilts that diversify even further.  I have savings looking 5 years out; Indexed Linked Gilts for years 6 to 14 and equities for 15+ years.

The chances are I won't invest any sizeable amounts, its simply something I wanted a little information on. In my 50s so as you say with investments being more of a long term thing I don't want to wait years and years as life is too short. But not really knowing much about the stock market - another reason for caution - I just wanted to learn a little more.

One thing to note regarding the longer term is that using savings, when taking tax into consideration, often lose money in real terms against inflation.  So you have inflation risk rather than investment risk.  This is the reason I have gone for ILGs for the medium term - I have locked the real value on my money (inflation proof) plus a little growth at current prices.  And all at virtually no risk.

In your 50s, you could have 35+ years left - that is long term and investing should be seriously considered.

jimjames

snookerloopy96 said:

eskbanker said:

It depends on what you're investing in within a S&S ISA, in that there are some low-risk investments that do correlate to interest rates, but equities don't.

Thanks. As of yet I've not made any investments other than this one for the cashback offer, but as rates are falling I may end up putting more in stocks and shares. The way I am any investments would be low or medium risk.

So is the cashback for just depositing money into the S&S ISA? I don't understand what you mean by "investments other than this one" as you've not said what you invested in. Santander S&S ISA is just a wrapper, it isn't an investment itself.

Cus

leosayer said:

Professional investors usually measure potential investment opportunities against the "risk free rate" which is the the level of return they can get from safe assets like government bonds ie. gilts.

Currently 10-year UK government bonds yield around 4.4% per year. If you are looking at making an investment now, how much of a higher (than 4.4%) return would you want to put your capital at risk by buying company shares?

As a result, in general share prices fall when interest rates rise and vice-versa although there are many exceptions to this such as banks (which can make more money with higher interest rates).

Interest rate generally rise to combat inflation which is why, over long time periods, equities are one of the best ways of protecting yourself from the damaging effects of inflation.

I've personally never understood some of this risk free logic.  If I can get 4.4% risk free, then in reality it's likely that inflation is at a similar level.  So I make nothing above inflation.  If 10 year UK government bonds yielded 10%, then it would be likely that inflation is similar.  So if in the next few years, if everything stayed the same, although I would feel richer, my £ doesn't go any further.  Same for if the yield was 1%. 
Based on that, if investing in equities, I should hope that it yields more than the current risk free rate. Should I care that equities yield 5% when risk free is 1%, any less than if equities yield 15% when the risk free is 10%?
Is it just that getting a higher risk free rate seems like it's better than normal but in reality it isn't?

Edit to add: you state 'professional investors' so perhaps they are only looking to match inflation in their investments at worst, but also look bad if they only make 1% risk free rate and feel the need to gamble a bit more looking for extra yield in the equity markets due to perception.  Does it look ok to earn 10% a year risk free in a high rates/high inflation environment and it doesn't matter if equity is yielding 15% as the numbers feel high

masonic

The long term return from government bonds has been around inflation +1%, so you get a little more than inflation, and cash is a little lower than that. Currently index linked gilts are around inflation +2% with sufficient duration, which gives you an implied rate of inflation when compared with nominal bonds. This real return is higher than "normal" and much higher than we've seen recently. Whereas equities have delivered inflation +5% according to the Barclays equity and gilt study.

A high risk free rate is associated with even higher inflation typically, so isn't something to wish for. On the flip side it means borrowing costs are also high, which tends to weigh on the economy and make it rather harder to achieve a risk premium. But that's not what is happening at present. We are currently in a disinflationary period with rates also falling, but equity valuations are high, which is reducing forward 10 year return estimates. That potentially wipes out any equity risk premium. (I know I am preaching to the choir here)

That said, not all equities are expensive, but most are sensitive to a crash in those which are.

snookerloopy96

eskbanker said:

snookerloopy96 said:
Not totally what I'm implying but its a little along those lines, or at least it might be if the interest rates really did bottom out.

snookerloopy96 said:
In my 50s...

Current base rate: 3.75%

Base rate for over 13 years from March 2009 to May 2022: below 1%

What did you do then?

Spent every penny on enjoying ourselves travelling up to the pandemic and didn't bother with saving at all. Lovely.