Equities are claims on cash flows, discounted
A share price is not a mood with a ticker. In the standard present-value account it is expected future cash to the owner, brought back to today at a rate that includes time, inflation compensation and a premium for uncertainty. Interest rates enter that rate. They are not the only thing that enters it.
Three channelsThis note describes valuation mechanics. It is not a view to buy or sell any share, sector, fund or index, including the FTSE 100 or FTSE 250. Market prices can fall. Past rate cycles are a record, not a schedule.
Where the rate touches a share
Separate the discount-rate effect from the earnings effect and from the simple comparison with cash. Mixing them is how a correct sentence about duration becomes a wrong sentence about your ISA.
The discount rate
Raise the real yield used to discount a stream of cash flows and the present value falls, more so when more of the value sits far in the future. Businesses whose story is profit in year ten rather than profit this year carry more of that sensitivity. That is why "long duration" is used about some growth shares even though they are not bonds. The metaphor is about timing of cash flows, not about a coupon.
A higher risk-free rate does not automatically mean a higher equity risk premium. The premium is the extra yield investors demand over gilts. It can compress or widen on its own. Quoting only the gilt yield as "the" cost of equity overstates how mechanical the link is.
Earnings and credit
Higher rates raise interest costs for firms that refinance debt, and they can cool the economy that produces the revenue. Banks can see a wider net interest margin on the way up, until deposit competition and arrears catch up. Housebuilders feel mortgage affordability. None of these is a free rule that survives the next earnings season without looking at the accounts.
The hurdle versus cash
When easy-access and short gilt yields are high, the bar for owning volatile shares is higher in the mind of a saver who can, for the first time in years, earn a nominal yield without price risk. That comparison ignores inflation, tax, and the fact that cash yields can fall as quickly as they rose. It is still a real flow of money between asset classes, visible in fund sales data.
Sectors are not a single trade
Listed property and utilities are often discussed as rate-sensitive because their cash flows are long and, in some cases, bond-like. They also have their own regulators, lease structures, vacancy and refinancing calendars. UK banks are often discussed as beneficiaries of higher rates, and then as casualties of it when credit turns. A sector label is a starting hypothesis for reading a report, not a position.
Global equity funds held by UK investors add a currency layer. A move in sterling against the dollar can overwhelm a domestic discount-rate story in a single quarter. Hedged and unhedged share classes are different instruments.
A worked discount, labelled as arithmetic
Suppose a claim is expected to pay 100 in ten years and nothing before that. At a 4 percent annual discount rate the present value is about 67.6. At 6 percent it is about 55.8. The cash flow did not change. The price of time did. A real company is a stack of such claims, with uncertain amounts, so the illustration is a ruler for intuition and nothing you should type into an order ticket.
The same arithmetic explains why a cut that is already priced can leave share prices unmoved on the day. If the two-year and ten-year yields already assumed the cut, the discount rate in the market did not wait for the vote. Surprise lives in the gap between the decision and the curve, and in the sentences the committee uses about the next meeting.
Clarkianode does not publish target prices. If a note ever appears to, treat that as a failure of editing, not as a signal.
The household version of the same mechanics
Cash allowances, a mortgage refix and a pension split across gilts and equities are where these notes become monthly money. The sketches are composite and fictional.
Read the household sketches