Effects of Interest Rate on Australian Stock Market

Question: Discuss about the Reprt for Effects of Interest Rate on Australian Stock Market. Answer: Introduction Interest rate is signifying the cost that is needed to be paid for using someone elses money. While buying any property or house, the homeowners usually take loans from bank through mortgages. Accordingly, they have to pay the money back for the privilege. In fact, the credit card users also face the similar scenario while paying the interests rates. On the other hand, Gourio, Siemer and Verdelhan (2013) defined that the stock market is the overall health of the economy. The lower interest rate is thus creating the significant impact on the stock market. The Federal Reserve often maximises or minimises the interest rate to fight the inflation and make it easier. Many of the commercial firms follow such process of Federal Reserve in order adjust the interest rate (Blocher, Reed and Van Wesep 2013). The investors thus need to learn the proper calculations regarding the significant impact of interest rate on stock prices. The study will be discussing the existing literature study based on this particular subject matter. The brief analysis of the stock market and interest rate will be presented in this project. The justified methodology will be applied to gather relevant data for this research study. Considering the proper methods, the project plan will be formulated. At the final stage, the expected outcomes will be analysed by focusing on the entire research study. Literature Review (Background of the Research) The economy of a developed country like Australia has experienced the stable interest rate for a longer period. During the time span of 1993 to 2006, the country enjoyed the growth in economic structure and low unemployment rate. More specifically, the Australian Banking industry experienced the recognisable changes due to the entry of foreign competitors and deregulation system. For example, the Reserve Bank of Australia (RBA) utilized the cash rate, which affected the interest rate. This effect was significant for controlling the inflation rate. Similarly, the ANZ bank in Australia faced the similar consequences due to such continuous changes in interest rates. Brown (2014) implied that interest rate and stock market are the major components for facilitating the growth in the economic structure of the developed countries. The effects of the interest rate on the stock market can be judged through analysing following aspects. Borrowing Costs Kurov (2012) notified that stock prices usually deal with companys profitability. Companies sometimes need to pay more for borrowing money. During such time, the high interest rate cut down the cost of business profits. The investors then perceive that the company is unable to make up the lost profits and they drop the rate of the stock prices. When the interest rate becomes higher, the investors can easily monitor the profits of the company (McCredie et al. 2013). On the contrary, the declining interest rate determines the cheaper borrowings for the company. Hence, the changes in the interest rate can create the inconsistencies in stock price rate. Capital Expenditure In some of the cases, it has been noticed that the high interest rate prevents the business companies to borrow the large assets. Each of the companies tries to configure the reasons of borrowing assets for the business purposes. Due to the higher interest rate, the companies reject the idea of buying buildings and large equipment (Rosa 2012). The business companies try to gather revenues for increasing the income rate. In some of the cases it has been seen in Australia that the investors perceive the degradation of the companys growth opportunities. In such times, they usually try to sell the stock and the stock prices become lower than the usual rate. Simultaneously, when the interest rate decreases, the companies try to purchase different stocks to earn more profitability. It increases the business income rate, which ensures growth in the future. Cash Flow It has been seen that the stock value is sometimes based on the cash flow of a company. The higher interest rate usually reduces the future cash flow of a company, as higher cash flow demands high interest rate. The investors even expect that the companies have been suffering from the high cash flow due to high interest rates (Joshi et al. 2013). On the contrary, it has been seen that the falling rate of interests determine more cashes that are left to the company. Hence, if the investors see that the cash flows are higher, they would be much interested in increase the price of their share. Australian Banking Industry During 1980 and 1990s, the banking industry in Australia experienced the huge changes in the regulation system and market structure. The volatile interest rates have created the significant impact on the employment rate. In fact, it can also be interpreted that in recent year, the Australian banking industry has been facing the significant growth. It is to be indicated that a companys value depends on the share-based profits (Engle, Ghysel and Sohn 2013). This profit is the differentiated form of a companys costs and earnings. In many of the cases, it has been seen that the borrowers do not depend on the fixed interest rates. The corporate borrowings even are not fixed; rather change according to the volatile market conditions. Hence, when the interest rate increases, the borrowers have to pay much interest. The profit level decreases due to such higher interest rates. However, it is important to note that in these current years, the Australian banking industry has been facing the co nsistency on the economic structure (Palley 2013). Therefore, the employment rate and business investment rates have been increasing gradually. However, it is quite difficult to predict whether this consistency will remain for longer time. When the interest rate goes higher, the investors or the shareholders start to sell the stocks. Similarly, if it can be perceived that the interest rate may fall, the stocks can be borrowed by the companies or shareholders. The crisis faced in the financial sector affects the decision making process of the investors. Any changes in the interest rates affect the expected profitability of a firm. In fact, in Australia, the financial companies have faced many of the crises due to the volatile interest rate. Liu, Di Iorio and De Silva (2014) explained that the short term and long term investment rate can create the significant impact on the stock market in Australia. The financial economists attempt to establish the relationships between the stock price and interest rate. The stock market is implied as the most important economic indicator of Australia. Wachter (2013) pointed out that the stoc k market concentrates on the long term commitments in real capital. It is important to note that during the fall of stock market, the country faces the recession period. An efficient investor usually searches for the profitable market for investing the capital amount. In the banking industry, it has been seen that if the interests of the bank is increasing, people switch their capital from share market to bank (Hong and Yogo 2012). At the end of the year, the invested amount on the bank will ensure much profit to the investors. On the contrary, if the interest rate paid by the depositor increases, the rate of the lending interests also increases. However, it has been seen that the inconsistent interest rate creates the diversified impacts on the stock market, which is the major source of the economic growth. According to Reinhart and Rogoff (2013), interest rate is somewhat related to the cost of borrowing, which is later used as the discount rate of the future discounts. The stock market is the leading economic indicator, which is expected to accelerate the economic growth. The growth of the economic structure helps in improving the quality and quan tity of the domestic savings. However, recognising the entire discussion, it has been seen that the fluctuation in the interest rates sometimes becomes difficult for the financial industries. The major difficulties faced by the investors or the depositors while making decision about investing the capital amount in the share market. The existing literature is even suggesting the investors to avoid investments during the high interest rate. Simultaneously, the financial industries will face the loss if the investors avoid the investments. Moreover, the loss in the stock market is even affecting the economic growth of the country (Brigham and Ehrhardt 2013). The higher amount of the interests is the major reason behind the recession. However, the market study is thus essential to deal with such frequent and repeated changes in the interest rates. In concentrating on the existing literature, the further studies will be exploring the major outcomes that are connected to this particular research subject. Research Question The research questions are described as follows: How the high interest rate affects the stock market in Australia? What is the perception of the investors of the Australian stock market if interest rate increases? What are the major challenges the Australian companies face due to such volatile interest rates? Research Methodology The study has been focusing on the impact of the higher interest rate on the Australian stock market. The entire study signifies the overall impact of high interest rate and considers the vast research on the stock market in Australia. Therefore, the thematic analysis would be better for this study, as it needs the exploration of the subject matter. The empirical study helps in gathering the in-depth idea about the subject matter. Hence, conducting the secondary research will be appropriate for this study. Research Design The study will be associated with the secondary researches. Hence, it is important to gather the secondary information and present the thematic analysis based on the empirical evidences. The interpretivism philosophy will be applied to analyse the secondary data by involving the psychological interpretations. This particular philosophy is helpful in formulating the evidenced based information with proper human assumptions (Crouch and Pearce 2012). On the other hand, the use of the descriptive techniques and inductive approach will also be suitable for this particular research study. It is necessary to explore the underlying issues that the stock markets have been facing due to the high interest rates. Crowther and Lancaster (2012) explained the descriptive design helps in exploring the key issues associated with the subject that have been recognised by collecting the relevant data. However, the application of such structured process and sequential methods, it would be better to under stand the underlying conceptual idea about the subject matter. The sequential steps followed in this research will be Gantt chart Activities of the Research 1-4 4-8 8-12 12-16 16-20 20-24 24-28 Selection of Research Topic Selecting the Secondary Sources Formulating the Investigation layout Assembling the secondary information derived from the Literature Making the plans for Research and Operations Application of the Research Techniques Analyzing Secondary Data Interpretation and Analysis of the collected data Findings and Analysis Concluding the expected research outcomes Formulation of the Draft Final Submission Table 1: Gantt chart (Source: Created by Author) Research Process The research process is needed to be conducted by following several sequential steps. At the initial stage, the rationale will be identifying the underlying issues with the stock market due to the higher rate of interests. Identifying such rationale, the research objectives and questions will be formulated. The time constraints may sometimes create the limitation in this entire research study. However, the literature review will be signifying the existing literature related to the similar subject matter. The study will also explore the information about the stock market in Australia and the conceptual analysis based on the impact of high interests rates. It is noted that the secondary data used in this literature study will be gathered from the authentic journals, articles, and websites sources. The application of the appropriate methodology is essential to conduct this research study. It is noted that the study is focusing on the overall stock market in Australia. In fact, the impact of the interest rate is needed to be analysed by considering the overview of the entire market. Hence, the secondary analysis of the study will be justified. The data analysis part will be associated with the thematic analysis of the secondary information. The evidence-based empirical tests will be incorporated to this study. The time schedule will be formulated to understand such sequential process of conducting the research. The required time-frame will also be mentioned. The recognition of the associated issues related to the subject matter will be aligned to the conclusion. Recognising the potential issues, the preferable recommendation will be incorporated to this study. Following such research steps will thus be beneficial for conducting the research study. Figure 1: Research Process (Source: Created by Author) Data Collection and Analysis This particular research study is associated with the analysis of the overall stock market in Australia. The secondary analysis would be appropriate to derive the in-depth idea about the subject matter. Hence, the study will be associated with the secondary data collection process. The secondary research process will include the evidence-based empirical study, which will be exploring the core concept of the subject matter. The similar researches were conducted previously. This secondary thematic analysis will be exploring the major issues that the stock markets have been facing due to the higher rate of interests. Hence, it can be interpreted that the secondary data collection process would be justified to conduct this particular research study. Expected Research Outcomes The analysis of the secondary data in this research study will be exploring the critical analysis of the overall stock market in Australia. It is noted that due to the high interest rate, the companies may suffer from the lower cash flows. The investors face difficulties to trust the companies before investing any capital resources. The investors usually expect to incur more profits in return of the invested amount. If the interest rate is higher, the possibility of extracting more profits will be lower accordingly. Hence, it becomes tough to take the proper decision during such times. Consequently, the price of the stock market falls and the companies face the loss. On the other hand, due to the high interest rate, the company cannot even plan for the future business practices. The low rate of the cash flows prevents the company to take the proper decision regarding the capital investments. Hence, it becomes critical to manage the invested costs during the high interest rates. The high interest rate even creates the significant impact on the recession process. The unemployment rate is also influenced by such higher rate of interests. However, recognising such issues, it can be expected that the research will be signifying some of the suitable strategies that are needed to be implemented. The stock market needs to identify the proper situation when the interest rate will be balanced. During such time, the recognition of the market is essential. In fact, in some of the cases, the advices received from the experts will also be effective for conducting the business associated with share market. However, the preferable cost effective strategies can b e expected to be analysed at the end of this research. References Blocher, J., Reed, A.V. and Van Wesep, E.D., 2013. Connecting two markets: An equilibrium framework for shorts, longs, and stock loans.Journal of Financial Economics,108(2), pp.302-322. Brigham, E.F. and Ehrhardt, M.C., 2013.Financial management: Theory practice. Cengage Learning. Brown, A., 2014. The reaction of the Australian stock market to monetary policy announcements from the RBA. Flinders University of South Australia, pp.51-65. Crouch, C. and Pearce, J. 2012 Doing Research in Design - Page 68, 2nd ed. London: Bloomsbury Publishing Plc. Crowther, D. and Lancaster, G. 2012 Research Methods, 2nd ed. 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