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Highlights
- While interest rate hikes are largely feared because of the rising cost of borrowing, they can also be beneficial in some way.
- Since economic recovery from the pandemic has not been even, a rise in interest rates could impact various sectors differently.
- Financial, consumer discretionary and healthcare are some of the sectors that could potentially benefit from rising interest rates.
Economies across the globe are preparing for interest rate hikes or have already started the process of monetary tightening. Australia stands out in this respect, with the central bank yet to provide any clarity on the timeline of interest rate hikes. While interest rate rises are largely feared because of the rising cost of borrowing, they can be beneficial for certain sectors of the economy.
Most experts are expecting a rate hike by the end of this year or in early 2023. However, navigating investments through rising interest rates is not easy. Having said that, if interest rates are increased in line with a recovering economy, managing investments becomes a bit easier for investors.
The Australian economy has exhibited a mixed pattern of recovery during the pandemic, which has been heavily influenced by lockdowns. The recovery has not been even across different segments, and thus, an interest rate increase could impact various sectors differently.
In this backdrop, let us look at some of the sectors that can potentially thrive in a rising interest rate environment:
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Financial sector
The financial sector has long been considered a direct beneficiary of rising interest rates. One should understand that each financial transaction has two facets to it, one side receives the money, and the other gives it. Thus, when interest rates rise, borrowers face increased costs of lending while banks and financial institutions receive higher interest payments.
As the interest rate margin expands from rising interest rates, banks observe a rise in profits during an interest rate hike. Additionally, this borrowed money goes into the economy in the form of investment or new ventures. This provides a leg up to the economic activity, prompting an increase in loan demand.
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Consumer discretionary sector
Often, a rising interest rate environment is linked with a strengthening economy. In the current context, this could mean that the economy is more likely to get back on its feet faster following interest rate hikes. This increased confidence could be predominantly seen across consumer discretionary products.
In a rising interest rate environment, producers of consumer discretionary goods such as apparel sellers, casinos, homebuilders, etc., largely remain on the safe side. The success of the consumer discretionary sector during this time is majorly due to the booming economy in the background. As the economy’s performance improves, employment and consumer spending would also increase, prompting consumers to embrace luxurious products.
Healthcare
Healthcare products and services are essential for survival and cannot be compromised in household spending. The healthcare industry is currently facing strenuous circumstances due to the pandemic. As the new Omicron variant presents a new challenge, the healthcare sector would have to devise a new strategy to respond to it, one that is better than the previous wave’s strategy.
However, as the healthcare sector builds upon the existing challenges, it is overall expected to stay resilient against potential headwinds. Even if the interest rate rises, the healthcare sector is more likely to stay afloat owing to increased awareness among consumers and the development of telehealth segments during the pandemic.
Those seeking investment venues during an interest rate hike need not be worried as many sectors tend to benefit in such an environment. Additionally, safe havens of investment such as gold and exchange traded funds (ETFs) are always an option, even during the worst-case scenarios. But it is imperative for investors to make their decisions after evaluating market forces and conducting proper technical and fundamental research to prevent potential losses.
