Look to banks and resources
It’s not all gloom as rates rise
RISING interest rates and inflation are wiping plenty of shine off the sharemarket, but some Aussie companies are expected to sparkle in the coming months as rates head higher.
The RBA’s cash rate increase from 0.1 per cent to 0.35 per cent this month was the start of a rate-rise cycle that is pummelling highgrowth stocks – particularly tech companies – but may see investors warm to previously unloved companies and sectors. Fear has pushed most shares sharply lower in recent weeks, but banks and resources stocks are likely to be relative future winners, share specialists say.
The benchmark ASX 200 rebounded 1.93 per cent to 7075.1 points on Friday after the Fed Reserve chairman Jerome Powell moved to allay fears about hefty rate increases, triggering a rebound in tech stocks. The best performer was Afterpay owner Block, which surged 15 per cent to $114.88. But Block was still off almost 20 per cent for the week and the ASX 200 1.8 per cent in the red.
AMP chief economist Shane Oliver said shares would face ongoing volatility as central banks lifted rates to combat high inflation, the impact of the war in Ukraine and China’s Covid lockdowns. But some stocks are expected to perform better than others.
Shaw and Partners senior investment adviser Jed Richards said banks made more money when rates were rising and could soon return to favour.
Mr Richards said Shaw’s top tips in the sector were Westpac, which had high exposure to residential property, and Bendigo and Adelaide Bank “if you want to step outside the big four”.
Banks had lent cautiously and house prices had climbed faster than borrowers’ debts, he said.
“The Commonwealth Bank is the better bank, but it’s not cheap at the moment.”
Mining and energy companies also benefit from higher inflation pushing up prices and interest rates.
“At the moment we are buying the commodity stocks,” Mr Richards said.
“BHP has fallen recently because iron ore fell slightly – however, it looks extremely interesting again and we expect
The market can continue to push highs for months before the gravity of interest rates start to take effect
Tim Haselum
a blockbuster full-year profit.” Shaw also liked Sandfire Resources for its copper exposure. “They recently doubled the size of their business through a Spanish acquisition.”
Another is gold producer Newcrest Mining. “With this volatility and inflation, gold comes back into the picture.”
Investment newsletter Marcus Today’s general manager Chris Conway said interest rate rises were generally not good for companies, and
the impact would be affected by the speed of the rises.
“If they go too fast or do something unexpected, that will likely derail markets, and possibly the broader economy,” he said.
Mr Conway said financial and commodity stocks, plus some utilities, would do well in a rising interest rate environment.
“The banks will benefit from fatter net interest margins – the difference between what they borrow and lend at
– while insurers should get better income for their investments,” he said.
“Energy and materials typically do well in a high inflation/interest rate environment as the economy is typically running hot, economic activity is strong, demand is high, and there are no alternatives. Utility companies with low debt and stable cashflows are increasingly in demand, such as Origin Energy.”
Catapult Wealth portfolio
manager Timothy Haselum said stockmarkets should be able to resist rising rates in the short-term.
“Historically, the market can continue to push highs for months before the gravity of interest rates start to take effect,” he said.
“It’s the ongoing rate rises that will make the difference, like slowly adding weights to a scale one by one.”
Mr Haselum said Westpac and insurance company QBE could be among the best per
formers. “No one can predict the many events that can trigger a jump in claims, but all things being equal, rising bond yields will significantly boost revenues from QBE’s capital reserves,” he said.
“Medibank Private has the double effect of people scared of Covid and wanting coverage and rising revenues from bond yields. Computershare acts like a cash box, as they hold funds and earn interest on it for corporate actions and activity.”