Interest rates can have a significant impact on the economy and the daily lives of Australians where the interest rate is set by the Reserve Bank of Australia (RBA) which meets on the first Tuesday of every month. For investors, interest rates can have a significant impact on the sharemarket in Australia and the performance of ASX-listed companies across the entire spectrum of industry and sectors from financial services, to mining, tourism and consumer goods.
Any business that has cash reserves or borrowings are impacted by interest rate changes, while others are exposed through the impact of consumer spending.
In general, the RBA adjusts interest rates to achieve their monetary policy goals, which typically include:
- Controlling inflation
- Promoting economic growth
- Managing currency exchange rates
- Managing the money supply
These four factors impact companies listed on the ASX, and the investment propositions that that present to shareholders and potential investors through the following factors:
(1) Cost of borrowing: Interest rates affect the cost of borrowing money, and this can impact companies’ profitability. When interest rates are high, it becomes more expensive for companies to borrow money to finance their operations, which can reduce their profits. This can cause investors to become less optimistic about the company’s future earnings potential and, as a result, the stock price may decline.
(2) Consumer spending and inflation expectations: Interest rates also play a role in setting inflation expectations. When interest rates are low, borrowing becomes cheaper, and consumers and businesses may borrow more money, leading to increased spending and higher prices. If investors expect inflation to rise, they may demand higher returns on their investments, which can lead to a decline in stock prices.
(3) Currency exchange rates and foreign income: Interest rates can also affect currency exchange rates, which can impact companies that do business overseas or are heavily reliant on revenue from a specific region. When interest rates in a country are higher, its currency tends to appreciate, which can make exports more expensive and hurt company profits. This can cause investors to sell shares of companies that rely heavily on exports, leading to a decline in the stock market.
(4) Bond yields: Interest rates also affect bond yields. When interest rates are high, bond yields also tend to be high, which can make bonds more attractive to investors compared to stocks. As a result, investors may sell stocks and buy bonds, causing stock prices to decline.
Overall, interest rates are a key factor in the performance of publicly listed companies where some will be more exposed to interest rate fluctuations than others. However, it is important to note that many other factors can also influence publicly listed companies which investors should closely monitor, including: company-specific events, economic conditions, geopolitical events, research & development and general financial health.
The Sentiment – a source of news and opinion shaping public sentiment on ASX-listed companies.
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