From my impression, most value investors are bottom-up investors and we here at ValueEdge are no different. In the course of our analysis, we pay no heed to interest rates nor inflation rates and most value investing books at most provide a perfunctory mention. However, a recent conversation with a fellow value investor sparked my curiousity in this topic – conceptually, how does the interest rate and inflation rate environment affect the practice of value investing?
Let’s start with the basics.
Interest Rate
Interest rates serve as a basis of risk-free returns. Theoretically, interest rates should play a part in investment decisions because it determines opportunity cost. In most markets, an investment which returns 15% annually would be considered decent, to say the least. Such a perception changes, if say, one could get a 10% interest rate on their fixed deposits. A 15% return on an equity investment would no ......