Though it’s kept interest rates steady at 0.5% since March 2009 (my entire adult life), the Bank of England will likely have to hike rates some time. Goldman Sachs thinks that event is coming at the end of 2015. But what’s likely to happen to stocks?
Goldman economists went back through all of the rate hikes since 1990, and tracked how the UK’s big listed companies performed.
This graph lays it out. In short, the variation is enormous. Sometimes equities have reacted badly and sometimes they react very badly, like in 1994. Other times, as in 1996, the reaction has not been so negative at all.
They have also broken it down by sector.
In short, some types of companies take rate hikes in their stride, and some get hit hard.
From the GS chart, it looks like house builders have been particularly hard-hit in previous rate hiking cycles, along with retailers. In comparison, telecoms, technology and utilities firms have generally shrugged off the impact in the last 20 years or so.
Here’s a snippet from GS, with an even further look back into previous rate hiking cycles:
Around past rate hiking cycles the equity market has frequently suffered a correction of 10% or more, for example in 1972, 1977, 1984, 1994 and 2006 (and was pretty close in 1999). But it did not happen in 1963, 1988, 1996 or 2003. Indeed it is not especially consistent and, not unexpectedly, depends on valuation, growth at the time, and how much the rate hike was anticipated.
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