1 Important Investing Perspective To Keep In Today’s Stock Market Environment

There are no shortage of worries in the stock market right now.

One issue that’s weighing on investors’ minds is the possible interest rate hike by the US Federal Reserve. But, worries on this matter may be overblown. Here’s one perspective about interest rates that was shared in a recent Motley Fool Market Foolery podcast by my US colleague Morgan Housel:

 “There is a difference between raising rates and the level of interest rates. If the Fed [US Federal Reserve] were to raise interest rates by a quarter of a percentage point, it would be going from zero to a quarter of a percentage point.

So, the idea that raising rates means that we are going to have high interest rates – it’s nowhere even remotely close to that.”

In other words, even if interest rates were hiked, it may not necessarily be to a level that becomes onerous for the economy or the stock market. Morgan put this into context by highlighting the relatively tepid level that interest rates may rise to (0.25% in this case) as compared to historical levels.

Given these, the current angst around the timing of the interest rate hike may really be much ado about nothing.

The Singapore context

Singapore’s three-month SIBOR (Singapore Interbank Offered Rate), a rate based on interest rates that banks use when lending unsecured funds to each other, was 1.14% on 17 September 2015. While it has risen substantially from around 0.4% at the start of the year, the three-month SIBOR still has some ways to go when compared to the 3.56% level seen in 2006.

In any case, where interest rates are or are going to be shouldn’t be something investors have to worry about. Here’s why.

From the start of 2006 up till 20 September 2015, healthcare provider Raffles Medical Group Ltd (SGX: R01) saw its earnings climb by 350%. Over the same period, luxury watch retailer Hour Glass Ltd (SGX: AGS) saw its earnings step up by 460%.

Both firms did not require much debt at all to drive that growth and so the level of interest rates were probably of little concern. You can see this in the chart below (note how the two firms’ balance sheets were mostly in net-cash positions over the years):

Raffles Medical and Hour Glass's net-cash position

Source: S&P Capital IQ. Note: 2006 in the chart for Hour Glass corresponds to fiscal year ended 30 March 2007 and so on

The two companies’ earnings acted as the fuel for their share price growth: Raffles Medical’s shares had gained 780% from the start of 2006 to 20 September 2015 while Hour Glass’s had moved up by 488%.

At the end of the day, it’s a company’s business growth which really matters, not where interest rates are or are going to be. So, remember to put any news you read into context. This may save you from selling in haste when you are troubled by matters which could turn out to have very little relevance to long-term investing.

Read more about investing and get more investing tips and tricks, FREE! Sign up here for The Motley Fool Singapore's weekly investing newsletter, Take Stock Singapore.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.