Smart Investments During Rising Interest Rates

When interest rates rise, investors need to consider how to adjust their portfolios. While some sectors are more sensitive to changes in interest rates than others, there are still opportunities for equity investors. Financials, industrials, consumer names, and retailers can all perform well when interest rates rise. Investors could also consider defensive sectors like consumer staples, healthcare, and physical assets like gold and precious metals.

Financials

When interest rates rise, financials tend to perform strongly. This is because brokerages see an increase in trading activity when the economy improves, and higher interest income from higher interest rates. This leads to increased profit margins.

However, it is important to note that the performance of financials also depends on the health of the overall market. Investors could see solid returns in defensive sectors as investors look to allocate their gains in sectors that are generally considered stable during market downturns.

Some sectors within the stock market are more sensitive to changes in interest rates than others. For example, consumer discretionary, industrials, and materials stocks tend to underperform during rate-hike cycles as investors anticipate that higher inflation and borrowing costs will begin to undercut business and consumer spending.

On the other hand, information technology is a high-growth sector with little direct exposure to interest rates. It is driven more by business investment and typically performs well in the early months of a rate-hike cycle.

When considering which stocks to buy before a rise in interest rates, investors can take advantage of the environment by investing in banks and brokerage firms, tech and healthcare stocks, and companies with large cash balances. Alternatively, they can set themselves up in a defensive position by investing in consumer staples, healthcare, and possibly physical assets like gold and precious metals ETFs.

Industrials

When interest rates rise, investors can take advantage of the environment by investing in stocks in relevant sectors. One of these sectors is industrials.

However, it is important to note that industrials stocks tend to underperform during rate-hike cycles as investors anticipate that higher inflation and borrowing costs will begin to undercut business and consumer spending. This is because when interest rates rise, the cost of borrowing goes up, which can impact businesses and consumers' ability to spend.

Despite this, there may still be opportunities for investors in the industrials sector during times of rising interest rates. For example, investing in companies with large cash balances can be a good strategy, as these companies may be better equipped to weather the impact of higher borrowing costs. Additionally, examining the specific industries within the industrials sector can help identify areas that may be more resilient to rising interest rates.

Overall, while the industrials sector may face some challenges during times of rising interest rates, there are still opportunities for investors who are willing to do their research and carefully select their investments.

Tech

When interest rates rise, investors need to consider how this will impact their portfolios. Tech is one sector that can be a good choice for investors when interest rates are on the rise.

The information technology sector is a high-growth sector that is driven by business investment rather than interest rates. It tends to perform well in the early months of a rate-hike cycle before higher rates have had time to cool things down. Tech stocks can be a good choice for investors when interest rates rise because the sector is not as sensitive to changes in interest rates as some other sectors.

It's important to note that not all tech stocks will perform well in a rising interest rate environment. Some tech companies, particularly those that are highly leveraged or have weak balance sheets, may struggle as the cost of borrowing increases. However, for well-run tech companies with strong fundamentals, rising interest rates can present an opportunity to strengthen their market position and gain an edge over their competitors.

Healthcare

When interest rates rise, investors need to consider how to adjust their portfolios. While some investors may want to take advantage of the new environment, others may want to take a defensive position.

In addition to being a defensive sector, healthcare can also benefit from higher interest rates through increased profit margins. This is because healthcare companies often have large cash balances, which can generate higher interest income when interest rates rise.

Another reason to invest in healthcare when interest rates rise is that it is a high-growth sector. The healthcare sector is driven by business investment and innovation, rather than being directly impacted by interest rates. As a result, healthcare stocks can continue to perform well even when interest rates are high.

Finally, investing in healthcare can provide diversification benefits to an investor's portfolio. Healthcare stocks often have a low correlation with other sectors, which means they can help reduce overall portfolio risk. This can be especially beneficial when interest rates rise, as it can help to protect an investor's portfolio from the potential negative impact of higher interest rates.

Real estate

When interest rates rise, investors need to be careful about where they put their money. While some sectors benefit from higher interest rates, others suffer.

When interest rates rise, REITs can be affected in a few ways. Firstly, as mentioned earlier, rising interest rates can lead to a decrease in demand for properties, which can impact the occupancy rates and rental income of REITs. Secondly, REITs often rely on debt to finance their operations, and higher interest rates can increase their borrowing costs. This can impact their profitability and ability to grow their portfolios.

However, it's important to note that not all REITs are created equal. Some REITs may be more resilient to rising interest rates than others, depending on their specific business models and the types of properties they own. For example, REITs that focus on essential properties, such as data centres or medical offices, may be less affected by rising interest rates as demand for these types of properties may be more stable.

Overall, while rising interest rates can present challenges for the real estate sector, there are also opportunities for investors who are willing to do their research and be selective about where they invest. By focusing on REITs with strong balance sheets, stable occupancy rates, and properties in high-demand locations or sectors, investors can potentially find attractive investment opportunities even in a rising interest rate environment.

Frequently asked questions