Interest rate is one of the most important factors that move the market. How will the changes in interest rates affect different industries?
Sectors benefited from the rising interest rate environment
Banks are likely to benefit from rising interest rates because their net interest margins are likely to expand as interest rates go higher. Banks make money by borrowing at a low short-term interest rate (Savings) and lend it out at higher longer-term rates (housing loan). A rate hike could give banks an opportunity to earn more from the spread.
However, banks may also face an increase in non-performing loans due to the borrower worsening repayment capability. Furthermore, when the short-term interest rate rises faster than the long-term interest rate, the yield curve is flattened. A flattening yield curve will erode the bank’s profit.
Insurance companies generally don’t make much profit from premiums. They invest premiums to generate profits. Since most insurance companies’ investments are bonds, rising rates can significantly boost profits
When interest rates rise, it pushes the value of currency up. A strengthening currency
helps importers to buy foreign goods cheaply.
Here are some sectors investors should be aware of under the environment of the rising interest rate
REITs perform poorly as rates rise. These companies rely heavily on borrowed money and could see profit margins contract if rates increase. As for REITs with relatively low debt levels, they could face selling pressure as they may seem less attractive when bond yields rise.
Utilities and telecoms
Utilities and telco companies tend to carry a lot of debt. Moreover, these companies don’t produce much growth and payout most of their earnings as dividends. In other words, these relatively high dividends are more like bonds as they provide a steady source of income to investors. If bond yields rise to a comparable level, utilities seem to be less attractive.
When the interest rate increases, interest payments on variable mortgages will increase. A higher mortgage rate will reduce housing affordability resulting to a slump in property sales.
Due to an increase in interest payments, consumers are suffering a reduction in disposable income. This may hamper consumer sentiment and push back their willingness in purchasing durable goods.
When interest rates rise, it pushes the value of currency up. This will make exporters harder to sell Malaysia made products due to a higher price leading to reduced competitiveness.
Interest rate trend is a macro trend where any reversal of the trend is a good time to re-evaluate your portfolio risk and to seek out emerging opportunities