Low-interest rates have been a key instigator in the nine-year bull run that we are currently experiencing. However, with the Federal Reserve steadily increasing interest rates, and promising to further increase interest rates in the coming years, the low-interest rate environment is set to change.
Investors need to pay careful attention to their investment portfolio, ensuring they are well placed to benefit from these rising interest rates. Besides diversifying their portfolio to bonds and other assets that can benefit from increasing interest rates, certain equities can also benefit from the rising interest rates.
With this in mind, here are three sectors that can benefit from further interest rate hikes.
Banks benefit from increasing rates by earning more from the rising net interest margin (the difference between interest they charge for loans and payout to depositors).
This was what we noticed in the last few quarters in Singapore where the rising rates had helped to boost revenue and profit at the three major banks.
Rising rates also tend to point to a stronger economy whereby borrowers are more likely to make loan repayments on time, leading to less non-performing assets.
The performance of an insurance company is very closely linked to the interest rate environment. This is because insurance companies make their money by investing the “float” (money that they collect in premiums).
These companies tend to invest in safe assets that can generate higher returns in high-interest rate environments.
Other investment holding companies that make money through investments can likewise benefit from the rising interest rates.
Consumer discretionary sector
Higher interest rates usually indicate a healthy economy, which in turn leads to consumers’ spending more. Because of this, companies that sell non-essential items such as cars, clothes, real estate and air travel can benefit from the increased spending.
The Foolish bottom line
Increasing interest rates, in theory, are detrimental to stocks as they mean investors can find better yielding investments elsewhere. However, there are still equities that can perform well in high-interest rates environments. As investors, it is crucial that we adequately diversify our portfolio so that we can thrive in both high and low-interest rate periods.
Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.