Investments
High interest rates are good news for value stocks
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Value stocks tend to benefit in a high interest rate environment as they are less reliant on borrowing for growth/activity.
Interest rates are currently at their highest levels in several years, and it appears that central banks intend to keep credit tight until at least mid-2024. In this situation, several experts agree that 'value' stocks have an advantage over 'growth' stocks. This is also the view of Hans-Peter Schupp, portfolio manager at Fidecum, as reported in 'FONDS Professionell'.
According to Schupp, many value stocks today can rely on two strengths: 1) still reasonable valuations, 2) sufficiently stable cash flows. Value companies, Schupp explains, are still relatively cheaply valued, despite the recent rally. This is because, until a few months ago, the bull market was driven by very low interest rates, which mainly benefited growth stocks.
However, in an environment of high interest rates and economic slowdown, the strengths of growth stocks become, at least in part, weaknesses: on the one hand, their high valuation, based on the promise of growth, may discourage many investors from buying them; on the other hand, the cost of borrowing has a major impact, as these companies often base their business development largely on their ability to obtain financing.
On this basis, interest rates remain a key variable for assessing investment prospects. However, it seems very difficult to make predictions: while some analysts believe that central banks have reached the peak of interest rate hikes, there are still many doubts about when central banks will decide to ease the credit crunch: some argue that this could happen as early as mid-2024, while others believe that it will have to wait until the end of 2024.
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