Five stocks that should profit from a rise in in­ter­est rates

The Daily Telegraph - Your Money - - YOUR MONEY -

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

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