AS anyone with a mortgage or cash savings in the bank knows, interest rate movements have a direct impact on your money. When interest rates go up borrowing immediately gets more expensive, although disappointingly for cash savers, banks never seem quite as hasty to raise their savings rates.
After decades of ultra-low interest rates, this will be new territory for many, but with rates rising yet again it’s something we’re all going to have to get used to.
Interest rates rises generally split people into one of two camps, based on whether you’re a borrower or a saver, but what you may want to consider instead is what impact these rate rises have on businesses and the opportunities there for us as investors.
Inflation-proof investments typically get a lot of attention at times like these. Commodities like gold are a typical ‘go to’ for investors wanting a hedge against rising prices. Bonds are another favourite, as their yields have an inverse relationship with interest rates, so when rates drop, yields rise and conversely, when rates rise, bond yields drop. Property investment in the form of Real Estate Investment Trusts (REITS) is another one investors tend to look at.
However, taking an active stock-picking approach can throw up some potentially even more interesting investment opportunities.
Take banks. They earn more when interest rates rise, based on the simple fact that they can charge more on the money they lend. Yes, savings rates rise too, but as any cash saver will testify, nowhere near as much as lending rates do. So investing in the banking sector can be a wise move – as interest income and operating profit margins benefit.
Also take a look at companies with a decent sum of cash in the bank. Cash-rich companies benefit from rising interest rates, because they earn more on their cash reserves. So all those companies that have been cutting costs and accruing cash during and post-pandemic will now be reaping even greater rewards, simply for having cash piles that are now paying their own way.
And take a look at technology and healthcare stocks. These companies need cash ready to reinvest in growth opportunities, so companies in these sectors tend to hold on to greater amounts of their profits. That might not put them on the radar of traditional income-seekers, on the lookout for regular dividends, but in this sort of high interest rate environment, investors can benefit from investing in these companies, which could see profits – and their share prices – soar.
And remember, there’s a world of opportunity. The UK offers plenty of choice, but the end of the bull market run in the US is also a source of great investment opportunity for investors willing to put in the leg work and seek out stocks – some of them are among the best-known companies in the world – many of which have taken a dive as markets have fallen.
Credit: Source link
