Last May 2022, the Reserve Bank made the first interest rate rise in 11 years to curb inflation, running at an annual rate of 5.1%. The ASX seems to have lost its ground, the Australian dollar has jumped, and the central bank already flagged that there is more to come.
But should your fear of interest rate hikes hinder you from embracing the opportunities? Whilst most investors panic about the interest rate changes, arming yourself with knowledge about the rights sector to invest in will be your greatest artillery.
Fact: It takes at least one year for a change in interest rate to see visible economic impact. However, the ASX stock market’s response is more immediate.
Below are the sectors that will benefit from an interest rate hike.
This sector, which includes insurance companies and banks, is considered a direct beneficiary of interest rate hikes and is most sensitive to changes. As the interest rate increases, so is their profit margin.
For banks, borrowers face increased lending costs while the lenders receive higher interest payments, resulting in a rise in profit. Consequently, the borrowed money goes to the economy either as new investments or ventures, supporting more economic activity that triggers a higher loan demand.
Last April, we witnessed the financial sector’s strength in keeping the ASX 200 higher. Four big banks lifted the ASX 200 and closed .1% higher despite the miners and energy dip.
As for the insurers, an improved consumer sentiment means more people are likely to purchase cars and homes, requiring more policy-writing. Remember that an increase in interest rate is often linked with a strengthening economy where people are more confident to make purchases.
Due to the high demand for new housing, the industrial sector can take advantage of the market behaviour. These industries include manufacturers of building products, trucks and electrical equipment.
According to the recent data, the sector remains to be a sound investment with 6,390.100 points in March 2022; an increase from its previous number of 6,146.100 points for February 2022. As Australia expects 180,000 immigrants by 2023, so is the need for further real estate developments.
Consumer Discretionary Sector
The improving employment rate urges consumers to spend outside the consumer staples. Hotel chains, restaurants, clothing manufacturers and similar industries can benefit from the economic health dividend. The latest data showed that the sector had an increase from its previous number of 3,034.700 points in February 2022 to 3,155.700 points in March 2022. In April, the sector shares rose by 1.5%, showing its positive market behaviour.
There’s no denying that Australians prioritise health and wellness. In fact, the country’s healthcare system ranks highly worldwide. And with government data suggesting a longer lifespan by 2055 (96.6 years for women and 95.1 for men), the healthcare industry will remain strong.
Whilst the pandemic still challenges the healthcare sector, it will remain resilient against harsh headwinds. The new technology in the industry opens up opportunities for investors, making it an excellent sector amidst interest rate hikes.
Your choice of investments is also anchored on your long-term strategy. If you wish to take advantage of the environment, choose the stocks from the above sectors. On the other hand, you can be in a defensive position during an interest rate hike and invest in safer options like gold.