Subject: Interest Rate (IR)

Interest rate has a great impact on valuation becos It serve as a discount factor for future cashflow. Investors that invest in the capital mkt faces two options, bonds n equities. both bonds n equities are like weighting machine, when ir rises bond price fall n bond yield rises n drawing funds from equities in it, as a result share price will fall. That' s the reason y everyone is so concern about yellen speech. 

There are different ways we can xplain how interest rate affect valuation n I will use a more simple way, dividend yield n bond yield to share with everyone. Those who are finance savy pls bear with me bcos I need to take care of those who are not trained in finance. Investment in equities besides capital gain, dividend is another form of income. Pension fund or institution fund are long term investors n dividend yield will continue to attract their investment during bad times. however they r also attracted by bond yield that will continue to give them the cashflow when times are bad.

We can extract the 10 years sg government bond yield from public info n currently it is at 1.67%. When we look at DBS, those who bought a sgd15 n below get a minimum dividend yield of 4% (0.6/15 x 100%) assuming the full year dividend is sgd0.60. Since dividend yield is much higher than bond yield, fund managers would choose to park their money in equities. They will only switch out to bonds when dbs dividend yield equalizes or below the bond yield thus DBS share price would have to increases to  sgd35.93 (sgd0.6/1.67%). 

If interest rate rises n resulted the rise in 10 years sg government bond yield to 2.5%, DBS share price would have to increase to sgd24 in order to have dividend yield of 2.5% as well (assume dividend paid remain unchanged). If the 10 years sg government bond yield rises to 3% then DBS share price would b sgd20 in order to produce the same dividend yield. From here we can see that as interest rate increase from current of 1.67% to 3%, valuation decrease from sgd35.93 to sgd20. 

This is a simple illustration to show y stock mkts are so sensitive to rate hike. In reality the valuation calculation is more complicated n mkt also can perceive rate hike positively like showing more confident in a stronger economy.

Thank you :)

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Subject: Interest Rate (IR)

Interest rate has a great impact on valuation becos It serve as a discount factor for future cashflow. Investors that invest in the capital mkt faces two options, bonds n equities. both bonds n equities are like weighting machine, when ir rises bond price fall n bond yield rises n drawing funds from equities in it, as a result share price will fall. That' s the reason y everyone is so concern about yellen speech. 

There are different ways we can xplain how interest rate affect valuation n I will use a more simple way, dividend yield n bond yield to share with everyone. Those who are finance savy pls bear with me bcos I need to take care of those who are not trained in finance. Investment in equities besides capital gain, dividend is another form of income. Pension fund or institution fund are long term investors n dividend yield will continue to attract their investment during bad times. however they r also attracted by bond yield that will continue to give them the cashflow when times are bad.

We can extract the 10 years sg government bond yield from public info n currently it is at 1.67%. When we look at DBS, those who bought a sgd15 n below get a minimum dividend yield of 4% (0.6/15 x 100%) assuming the full year dividend is sgd0.60. Since dividend yield is much higher than bond yield, fund managers would choose to park their money in equities. They will only switch out to bonds when dbs dividend yield equalizes or below the bond yield thus DBS share price would have to increases to  sgd35.93 (sgd0.6/1.67%). 

If interest rate rises n resulted the rise in 10 years sg government bond yield to 2.5%, DBS share price would have to increase to sgd24 in order to have dividend yield of 2.5% as well (assume dividend paid remain unchanged). If the 10 years sg government bond yield rises to 3% then DBS share price would b sgd20 in order to produce the same dividend yield. From here we can see that as interest rate increase from current of 1.67% to 3%, valuation decrease from sgd35.93 to sgd20. 

This is a simple illustration to show y stock mkts are so sensitive to rate hike. In reality the valuation calculation is more complicated n mkt also can perceive rate hike positively like showing more confident in a stronger economy.

Thank you :)

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