Second, equities are influenced by changes in the long-term interest rates which investors use to discount expected future cashflows. This is known as the rate. Investors value cashflows far in the future – say in a decade’s time – less than those in a year’s time. How much less depends on interest rates (though arguably it’s global, rather than just UK, rates that matter here). 

When long-term rates rise, the stocks of high-growth companies, which are expected to deliver more of their cashflows further in the future, often fare worst. We saw a clear illustration of this in January. As long-term rates rocketed around the world, growth stocks suffered, while their “value” peers proved more resilient. In the US, almost 40 per cent of stocks in the growth-heavy Nasdaq index fell by more than 20%, compared with around 15 per cent of stocks in the broader S&P 500. The UK market, which is light on growth stocks, outperformed.

For most of the past decade, focusing on growth stocks was generally a successful strategy for investors as long-term interest rates declined in every major economy. The possibility of further increases in long-term rates globally is a key reason for our caution about such strategies going forward. 

Ed Smith is co-chief investment officer at Rathbones Investment Management. Oliver Jones and Jeremy Ocansey are asset allocation strategists at Rathbones Investment Management.