Turning to the bond markets for clues

GLOBAL equities closed strongly last week, thanks to the strong showing by markets in US and Europe. You might have recently heard that certain stocks tend not to do well during periods of rising yields. Why do some stocks love them, and others hate them? The speed by which yields are rising as well as the shape and co-movement of the different parts of the yield curve, may provide clues.

Before we get there, firstly, it is important to understand how stocks are valued. The fundamental basis of stock valuation begins with valuing its projected cash flow over a foreseeable investment horizon. This future cash flow is discounted back to the present by its cost of capital, which is influenced by the risk-free yield of a government bond.

Growth: Stocks that benefit from lower rates