If theres one word guaranteed to make stockbrokers and share investors panic, it is Greenspan. As head of the US central bank, Dr Alan Greenspan controls Americas official interest rates. But why shou
If theres one word guaranteed to make stockbrokers and share investors panic, it is Greenspan. As head of the US central bank, Dr Alan Greenspan controls Americas official interest rates. But why should his recent threats to raise official interest rates send a shiver down stockbrokers spines? Mr Mike Kendall, manager of private client research at brokers, J B Were & Son, explains that raising interest rates for borrowing money has various effects on stock markets. Increasing interest rates raises the costs of borrowing from banks, and for private individuals we generally see that emerge through higher mortgage payments, he says. When your mortgage payment goes up you have less in your wallet to spend. When we see people spending less money, companies revenues are less and their profits go down, and when profits go down a company is less valuable,
says Kendall.
The cost of corporate borrowings also goes up, and if companies are paying more debt because interest rates have risen, theyre making less profit and are less attractive again. The fixed interest rate market of bonds and banks term deposits may become more attractive, and share investors may sell shares, depressing stock markets further.
Although Australias stock market shrugged off a 0.5 per cent rise in official interest rates in February, Mr Kendall says there could be downward movement locally if Dr Greenspan raises rates in the US. But if you want to stay in the market, which stocks are resilient to these interest rate moves? Mr Andrew Coloretti, client adviser with HSBC Securities, says if people postpone borrowing from banks, then that sector may not achieve efficiency gains with tight margins. Building companies could become less profitable with less work. Mr Coloretti says companies with high borrowings and little revenue could suffer - holders of debt-laden Internet start-ups take note - but larger telecommunications stock such as Telstra have sufficient cash flow to ride out the bumps.