Are high-interest rates slowing down investments?
Understanding the impact of interest rates on investment decisions and financial strategies
To contain inflation, central banks may decide to raise interest rates. This measure aims to slow overall demand and limit the rise in consumer prices. In this context, the cost of credit increases — whether for mortgage loans, credit card balances or any other form of debt financing.
For companies as well, whose growth often relies on borrowing, these conditions can slow down expansion plans.
But what does an environment of high interest rates mean for your investment strategy?
Impact on savings
One of the first effects of rising interest rates is felt directly on savings. In this environment, borrowers face higher costs to access credit, while lenders benefit from improved remuneration of their capital. As a result, savings accounts tend to offer more attractive returns and can represent a relevant short‑term solution, particularly when there is a need for liquidity in the near future.
However, despite this improvement, savings returns are often insufficient to fully offset inflation — which, it should be recalled, is precisely the reason behind the rise in interest rates.
Bonds become more attractive
In general, an increase in interest rates is accompanied by higher bond yields. This effect is not uniform across the bond market and depends on several factors, including the level of the coupon, the bond’s maturity date and other specific characteristics.
Analyses conducted by Morningstar show that in an environment marked by high interest rates, bond indices often rank among the few asset classes displaying a clearly positive trend. This observation is relatively intuitive: as borrowing costs rise, the yields offered by bonds become more attractive.
Depending on your risk profile — particularly from a diversification and return‑stability perspective — it is generally appropriate to maintain exposure to bonds within your portfolio. When interest rates rise significantly, increasing this allocation can even be a sensible way to improve the overall balance between risk and return.
Should equities be avoided during periods of high interest rates?
In general, high interest rates tend to put pressure on equity markets. By increasing the cost of financing, they weigh on corporate profitability and make growth projects more expensive. However, this impact is not uniform and varies depending on the type of equities.
Growth stocks are often the most affected by rising interest rates. Their valuations are largely based on expected future earnings: when rates increase, the present value of these future profits mechanically declines. In addition, higher borrowing costs make growth targets more difficult to achieve. In such an environment, it is common to see the prices of growth stocks fall.
Similarly, in periods of high interest rates, stocks offering high and stable dividends face increased competition from bonds that have become more attractive. As bond yields rise, some investors may favour fixed‑income instruments over dividend‑paying equities.
By contrast, certain categories of equities can benefit from a high‑interest‑rate environment. This is particularly the case for banks and financial stocks, whose margins often improve when lending rates increase. These securities therefore tend to be more resilient — and may even outperform the broader market — during periods of elevated interest rates.
It may also be relevant to focus on so‑called defensive stocks, whose performance is less closely linked to economic growth. Sectors such as healthcare or consumer staples generally offer greater stability during economic slowdowns.
Finally, companies with strong cash reserves and low levels of debt typically show greater resilience in tighter financial conditions. Less dependent on borrowing, they are generally better positioned to navigate periods of high interest rates.
Staying diversified to cope with any scenario
Rising interest rates are a necessary lever to prevent the economy from overheating and to curb price increases. However, it cannot be ruled out that a tightening of financial conditions may, in some cases, slow economic activity or even lead to a recession. In this environment, it remains essential to diversify your investments across different asset classes, geographic regions and sectors. Diversification helps strengthen your portfolio’s resilience to sudden market movements and mitigate overall risk.
Our experts are at your disposal to guide you, answer your questions about changes in interest rates and help you define the investment strategies best suited to your situation and objectives.