How Sensitive Are Stocks To Interest Rates? Time to Find Out
Kanebridge News
    HOUSE MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $1,471,287 (-0.47%)       Melbourne $953,578 (0%)       Brisbane $813,837 (+0.79%)       Adelaide $762,215 (+0.12%)       Perth $660,264 (+0.59%)       Hobart $715,003 (-0.87%)       Darwin $649,416 (+2.32%)       Canberra $938,596 (-3.12%)       National $942,992 (-0.51%)                UNIT MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $699,562 (+0.47%)       Melbourne $469,057 (-0.10%)       Brisbane $443,473 (-0.97%)       Adelaide $377,120 (+2.85%)       Perth $368,266 (+0.42%)       Hobart $549,709 (-0.61%)       Darwin $339,112 (+0.57%)       Canberra $492,401 (+2.61%)       National $493,098 (+0.45%)                HOUSES FOR SALE AND WEEKLY CHANGE     Sydney 8,253 (+355)       Melbourne 11,270 (+481)       Brisbane 8,990 (+21)       Adelaide 2,573 (+50)       Perth 8,017 (+44)       Hobart 886 (-7)       Darwin 252 (+5)       Canberra 876 (+38)       National 41,117 (+987)                UNITS FOR SALE AND WEEKLY CHANGE     Sydney 7,339 (+207)       Melbourne 6,852 (+127)       Brisbane 1,928 (+30)       Adelaide 437 (-33)       Perth 2,214 (+33)       Hobart 140 (+3)       Darwin 334 (-5)       Canberra 435 (+1)       National 19,679 (+363)                HOUSE MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $680 ($0)       Melbourne $500 ($0)       Brisbane $565 ($0)       Adelaide $530 (+$5)       Perth $570 (+$10)       Hobart $560 ($0)       Darwin $678 (-$3)       Canberra $700 ($0)       National $606 (+$1)                    UNIT MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $620 (+$3)       Melbourne $470 (+$10)       Brisbane $510 (+$10)       Adelaide $430 ($0)       Perth $500 (+$10)       Hobart $498 (+$13)       Darwin $560 (+$10)       Canberra $550 ($0)       National $523 (+$7)                HOUSES FOR RENT AND WEEKLY CHANGE     Sydney 6,511 (-206)       Melbourne 6,333 (-297)       Brisbane 4,007 (-126)       Adelaide 1,167 (-60)       Perth 1,654 (-51)       Hobart 274 (+2)       Darwin 144 (+2)       Canberra 710 (-5)       National 20,800 (-741)                UNITS FOR RENT AND WEEKLY CHANGE     Sydney 7,667 (-348)       Melbourne 5,301 (-243)       Brisbane 1,588 (-99)       Adelaide 402 (-13)       Perth 705 (-26)       Hobart 112 (+3)       Darwin 234 (-4)       Canberra 569 (-24)       National 16,578 (-754)                HOUSE ANNUAL GROSS YIELDS AND TREND       Sydney 2.40% (↑)      Melbourne 2.73% (↑)      Brisbane 3.61% (↑)      Adelaide 3.62% (↑)      Perth 4.49% (↑)      Hobart 4.07% (↑)        Darwin 5.42% (↓)     Canberra 3.88% (↑)      National 3.34% (↑)             UNIT ANNUAL GROSS YIELDS AND TREND       Sydney 4.61% (↑)      Melbourne 5.21% (↑)      Brisbane 5.98% (↑)        Adelaide 5.93% (↓)       Perth 7.06% (↓)     Hobart 4.71% (↑)      Darwin 8.59% (↑)        Canberra 5.81% (↓)     National 5.52% (↑)             HOUSE RENTAL VACANCY RATES AND TREND       Sydney 1.6% (↑)      Melbourne 1.8% (↑)      Brisbane 0.5% (↑)      Adelaide 0.5% (↑)      Perth 1.0% (↑)      Hobart 0.9% (↑)      Darwin 1.1% (↑)      Canberra 0.5% (↑)      National 1.2% (↑)             UNIT RENTAL VACANCY RATES AND TREND       Sydney 2.3% (↑)      Melbourne 2.8% (↑)      Brisbane 1.2% (↑)      Adelaide 0.7% (↑)      Perth 1.3% (↑)      Hobart 1.4% (↑)      Darwin 1.3% (↑)      Canberra 1.3% (↑)      National 2.1% (↑)             AVERAGE DAYS TO SELL HOUSES AND TREND       Sydney 42.5 (↑)      Melbourne 44.7 (↑)      Brisbane 46.7 (↑)      Adelaide 39.8 (↑)      Perth 45.7 (↑)      Hobart 43.3 (↑)        Darwin 40.7 (↓)     Canberra 47.9 (↑)      National 43.9 (↑)             AVERAGE DAYS TO SELL UNITS AND TREND       Sydney 43.8 (↑)      Melbourne 45.0 (↑)      Brisbane 45.7 (↑)      Adelaide 39.7 (↑)      Perth 47.4 (↑)      Hobart 51.1 (↑)      Darwin 61.3 (↑)      Canberra 44.6 (↑)      National 47.3 (↑)            
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How Sensitive Are Stocks To Interest Rates? Time to Find Out

As central banks start lifting borrowing costs from near zero, profitless startups are certain to suffer.

By Jon Sindreu
Mon, Mar 21, 2022 10:25amGrey Clock 3 min

There is a new urgency to the old question of how much credit falling interest rates should get for your stock portfolio’s strong performance.

The Federal Reserve and Bank of England have raised borrowing costs over the past week, confirming the end of near-zero rates and, analysts fear, of a decadeslong boost to stock valuations.

Higher share prices relative to company earnings explain half the returns of the S&P 500 over 10 years. That proportion rises to 60% for the technology-heavy Nasdaq as Google parent Alphabet Inc., Meta Platforms Inc. and Amazon.com have left “old economy” banks and utilities in the dust.

The raft of profitless tech-focused startups that hit the market last year, such as electric-vehicle maker Rivian Automotive Inc., fintech lender SoFi Technologies Inc. and various air-taxi ventures, seem particularly exposed to the turning tables. Otherwise, though, investors need to do some homework before simply rotating back to old-economy sectors.

A bond with a 2% coupon becomes less attractive when the return investors get by leaving the money in the bank rises from 0% to 1%. And its resale value will fall a lot more if it matures in 10 years rather than in two, because investors are locked in for a decade of disappointing returns. In financial jargon, it has higher “duration,” which is both a measure of sensitivity to rates and the weighted average time until all the cash flows are paid.

What about stocks? While they offer much more legroom to speculate because payments aren’t fixed, their value is—usually—still tied to expectations of making a profit. Mature businesses with predictable dividend payments can be seen as having low duration, whereas growth-led firms have more of their value tied to earnings in the distant future. Startups have extra-long duration: They are akin to buying a lottery ticket with a payout in 10 years’ time.

Most stocks, however, fall somewhere in between, which requires going beyond intuition or sector correlations with bond yields.

In a 2004 paper, University of Michigan researchers Patricia M. Dechow, Richard G. Sloan and Mark T. Soliman popularised a way to estimate a company’s “implied equity duration” by predicting future cash flows based on the growth of sales, earnings and book value. Applying their math to S&P 500, Euro Stoxx 50 and FTSE 100 stocks puts the duration of blue-chip stocks at around 20 years. As expected, the consumer services, healthcare and tech sectors, which have done better in the period of rock-bottom borrowing costs, rank above average, while energy, finance and telecommunications are below.

Sector averages are misleading, however. Within tech, the implied duration of Amazon and Netflix is above 23 years, whereas International Business Machines Corp. and Intel Corp. are closer to the market average and Hewlett-Packard Enterprise Co., a maker of laptops and printers, ranks near the bottom at less than 14 years.

Meanwhile, electric-vehicle maker Tesla Inc. is an example of a long-duration disrupter in a mature industry. Cable operator Charter Communications Inc. and clothing giants Inditex, Burberry and Under Armour Inc. are less-obvious cases of old-economy but high-duration stocks.

Investors need to be careful with distortions created by the pandemic, which sunk the short-term profits of some more traditional sectors. As a 2021 paper shows, the crisis lengthened their implied duration by tying more of their value to post-Covid earnings, making casinos and cruise companies look more growth-focused than they are.

Markets still predict that the Fed will keep rates below 3% this economic cycle, compared with more than 5% pre-2008. So this past decade’s trend may only be partially reversed, especially because much of the valuation premium fetched by the likes of Amazon and Alphabet reflects the growing dominance of these firms in the real world. Conversely, banks may make more money when rates are higher, but the main reason they have suffered in recent years is weak economic growth and stricter financial regulation.

This is the moment for investors to take a closer look at the duration of their individual stockholdings. But they shouldn’t forget that strong balance sheets and growing profits win the day, no matter where interest rates are.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 20, 2022.

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In a decision that will surprise few economists – or borrowers –  the RBA announced a further 0.25 percent rise in interest rates when it met earlier this afternoon. This brings the current interest rate up to 3.35 percent, a 3.25 percent increase since May last year.

Prior to today’s announcement, when the interest rate was still 3.1 percent, research by Roy Morgan released at the end of last month revealed that 23.9 percent of Australian mortgage holders were ‘at risk’ of mortgage stress in the three months to December 2022. Mortgage stress is where one third or more of weekly household income is going towards mortgage repayments.

In a tight rental market, mortgage pressure has also lead more landlords to pass rate rises onto tenants.

Research director at CoreLogic, Tim Lawless, says the latest rate rise moves beyond the ‘serviceability assessments’ some borrowers passed when applying for their loans.

“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate,” he said. “The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.  

“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”

Today’s decision signals the RBA’s continued efforts to use the cash rate to manage inflation, which sits at 7.8 percent annually. Time will tell whether it has been successful in curbing spending or whether, as many predict, there are more rate rises on the way. Mr Lawless said overseas economies could offer some hope to borrowers.

“Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending,” he said.  “Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022, albeit from the highest level since the mid-1990s (outside of the impact from the introduction of GST in 2000).

“Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35 percent, through to another 75 basis points of hikes.  However, a recent survey from Bloomberg puts the median forecast at 3.6 percent, implying one more hike of 25 basis points in the wings.”

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