Rising interest rates get a bad rap for good reason: They make credit cards and other borrowing more expensive, they wreak havoc on the market, and a slowing economy can lead to a recession. But with any recession comes opportunity. Some sectors that use the US dollar tend to outperform in higher interest rate environments, including financials, healthcare and international equities. Here’s how you should arrange your portfolio to make the most of the Fed’s drive to reduce inflation:
consider the bonds
Rising interest rates make some assets, such as bonds, more attractive to investors. “In this environment, investors may want to hold a portfolio of high-quality bonds with a moderate duration to generate income as well as potentially offset equity risk,” said Carl Ludvigsson, managing director at Bel Air Investment Advisors. “If the US slips into recession, both inflation and interest rates are likely to decline which is generally good for fixed-rate bonds.”
For investors looking to see returns from Treasury securities in the short term, Treasury bills are a good option while interest rates are high. “For the first time in a long time, people can have access to very short-term securities,” said Jamie Cox, managing partner at Harris Financial Group. “People who are looking for short-term places to deposit money outside the bank have taken refuge in treasury bills, where you can get a three- to six-month bill with an interest rate of 4.6% to 4.8%,” he said. Can.” (You can read more of our coverage on bond investing here.)
Weighing Price Stocks on Growth
When interest rates are high and the economy shows signs of heading into a recession, stocks with solid fundamentals will outperform growth stocks, which thrive in bull markets. “Growth stocks depend on the future and require borrowing more money at higher rates to get future returns,” explained Mark Newman, chief investment officer at Constrained Capital. “Value stocks are better immediate cash flow generators that can take advantage of the money earned in the future,” he added.
In particular, financials are one sector that does particularly well because they are in the business of distributing capital and benefit directly from rising interest rates. “When interest rates are going to be high for a long time, where you want to invest will largely be value-oriented assets such as banks, financials, credit card companies or insurance companies,” Cox said. “These are all places where you can make huge amounts of money because they are allocators of money in the economy,” he said.
Focus on dividend paying stocks
Another good asset to own while rates are dividend paying stocks. Companies like consumer staples and healthcare are still profitable in an environment with rising rates. “Consider dividend-paying stocks that have the potential to increase their yield,” Cox explained. “It’s a really good place to invest your money when interest rates are rising, because as interest rates go up, so will the dividend yield,” he said. “Dividend-paying stocks may do better because the higher income profile can compete with the higher interest rates offered at banks, for example,” Neumann explained.
Seek opportunities internationally
Now is also the time for investors to expand their portfolios in emerging markets and other international regions. Cox explained, “Since interest rates have risen faster in the United States than around the world, this has created currency differentials and this has made large dollar-based businesses or companies with US-based businesses more attractive.” He added that pharmaceuticals is one sector that has particularly benefited from currency differentials, as companies like Pfizer have large markets internationally but are US-based so use the dollar.
“Consider a Japanese company that earns a strong dollar (due to higher interest rates) and then repatriates the yen that has weakened, ie when they report earnings they get more yen with each dollar. That said, a lot of this could depend on where the actual product manufacturing takes place,” Neumann explained.
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