When interest rates are low it makes it cheaper for businesses to borrow money to finance new projects and grow their businesses. This is generally great news for shares, as it coincides with periods in which the economy is growing, consumer confidence is high, and investors are optimistic about the future.
However, when rates rise, share prices can often take a hit. Companies have to pay more to service their debts, which can particularly hurt junior companies and growth shares. These companies may not yet be generating sufficient revenues to cover their higher interest repayments, which could result in insolvency in a worst-case scenario.
Some types of shares, like value stocks and defensive shares, can still perform well in a high-rate environment. Investors often flock to these shares because they are seen as safe haven assets to hold when the broader economy is struggling.