Economic Value Added (EVA)
Global and international portfolio managers often take interest rates into consideration in deciding upon country allocations. This chapter focuses on the usefulness of interest rates in country selection strategies. It reviews the mechanisms through which the level and change in interest rates should be expected to affect equity market returns. It then presents evidence that interest rates are helpful in selecting a portfolio of countries that will outperform international equity benchmarks, and suggests explanations for why interest rates are useful in predicting market returns. Investors typically find it useful to think of stock prices as the discounted present value of future earnings or dividends. It is not difficult to find confirmation that equity returns and interest rates are inversely related over time for individual countries. Finally, academic research has tended to focus on risk attributes as the predictable component of equity returns.