The Impact Of Falling Interest Rates On Share Prices

Yields on treasury securities have trended downward since beginning of year. This is partly due to the declining inflation rate and strong demand for risk free government treasuries. Given the year on year decline of the 91-day and 182-day bills from a high of 25.83% and 26.40% to 16.25% and 17.88%, there has been a compelling need to share with you the impact that this low interest rate regime can have on the investment industry, corporate profitability and the economy as a whole.

In this post we will look at how falling interest rates will affect equity/share prices in the country and use subsequent post to address the other issues.

First, declining treasury yields or interest rates will impact positively on equity prices as fund managers shifts and reduce their treasury holding in search of high yields from blue-chip equities listed on the Ghana Stock Exchange. The flow of funds from low yield Government treasuries into cheap equities will consequently drive prices of shares and trading volumes on the stock exchange. This will increase total return for listed equities and the GSE index moving forward.

Secondly, the low interest rate regime will help reduce interest servicing and loan cost for businesses operating within the country. This will lead to increased corporate earning and profitability, which will translate into high dividend payments and increased attractiveness of equities moving forward.

Indeed if the low interest rate regime is to persist then fund managers should consider owning quality shares in the client’s portfolio.

Next week we will discuss how the falling interest rates will impact Bond prices and cost of funds nationally.