Five stocks that should profit from a rise in interest rates
Certain companies directly benefit when rates increase. Laura Suter picks five of the best
The arrival of Donald Trump in the White House has brought expectations of a boost to the American economy and an increase in interest rates across the globe. Any rise from the rock-bottom Bank Rate of recent history will benefit many British companies. We look at five stocks that appear well placed to benefit from a rise in interest rates.
Lloyds has been touted as the biggest beneficiary of interest rate rises by many fund managers. It has one of the simplest business models and its domestic focus makes it most exposed to a rise in rates in Britain.
The share price now hovers around 66p, but Stuart Mitchell, of SW Mitchell Capital, the asset manager, said he thought the bank was worth around 100p a share.
As interest rates increase, the bank will not pass all of the rise on to savers. Instead it will retain some of the increase, boosting profit margins.
The company also pays a decent dividend: its shares currently yield 3.4pc.
Car insurer Hastings listed on the stock market only in 2015, so it does not have a long share price record.
Car insurers take in the premiums paid by customers each year and then invest that money, typically in a one-year investment to match the duration of the policy.
“Historically, these companies made a huge amount of money in a higher interest rate environment,” said Jack Barrat, a fund manager at GLG, the asset manager.
“In a rising rate environment, if that one-year investment was yielding less than 1pc and now yields 1.5pc to 2pc, that extra return doesn’t get passed on to the consumer. Instead the company will keep it and it will lead to significant earnings momentum.”
Hastings is also better positioned that some rivals as it adopted new technology early, which is helping it to gain market share.
The yield is estimated to be 4.9pc for 2017, assuming the current share price.
Tullett Prebon is a brokerage business, dealing mainly in bonds and the foreign exchange markets. The company links buyers and sellers of bonds and foreign currency products.
It is attractive for two reasons: interest rate volatility boosts business and it has recently merged with a rival.
The company will benefit from interest rate rises globally, as well as in Britain. When interest rates were low and static, its business “dried up”, said Mr Barrat.
“As volatility starts to return, they
HSBC is a far more international bank than Lloyds. However, this means it stands to benefit from interest rate rises in America as well as in Britain.
“HSBC has suffered from a few things in recent years: lower interest rates, lower global trading volumes and tougher regulatory approaches,” said Ed Meier, a fund manager at Old Mutual Global Investors.
“However, we are convinced that the regulatory noose has stopped being tightened in any significant way, and now, with the first two hindrances easing, too, HSBC’s fortunes are being transformed.”
He added that the bank had $400bn (£320m) in excess deposits, which it typically invests in government bonds. As this money is reinvested in higher-yielding investments, the bank’s revenues will be boosted.
The stock also has a 6pc yield, making it attractive for income investors.
Insurers such as Aviva, which sponsors Premiership Rugby, are likely to benefit from an interest rate rise as they earn more on the money they invest