Interest rates

Hi Carl – a great question. There are various valuation models that are influenced by the cost of capital which I won;t go into here,  but overall when the cost of capital increases, valuations come down across the board, but more so in the sectors that are more expensive. With specific reference to high value growth type stocks, the easiest way to think about it is that we are investing a dollar now on the expectation that earnings will grow strongly in the future. Because they are growing strongly, investors are prepared to pay a higher price for the earnings stream against a company that has solid earnings now but with little growth. When rates are low, the opportunity cost of having capital tied up in a company that will deliver in years to come is low, but when rates rise, the opportunity cost also goes up making it less appealing.