- Is economics driven by ideology good for shares?
- Inflation expectations dictate the cost of money
One man’s terrorist is another man’s freedom fighter, and a company’s cost of capital is the return investors require to provide it with finance. The first statement is an overworked aphorism, the second is something stockpickers should heed. But why link them?
The reason has to do with ideology mingling with economics and political passions, entwined with the age-old debate over whether government largesse crowds out private sector investment. What’s not controversial is that inflation drives interest rates and the size of returns demanded by investors, making it more expensive for companies to raise capital.