Stockmarket winners from rising inflation and interest rates

Households hate rising interest rates in many instances, but it’s a promising sign for some sharemarket investments. Here’s why.

Inflation is up, interest rates are set to head higher sooner, and borrowers won’t be happy.

But investors should be, with the sharemarket a likely winner from rising rates and inflation and some stocks tipped to do better than others.

Sharemarket specialists say rising rates and inflation can boost profitable companies, as long as the moves are not too sudden or too high, and they believe banks, resources and insurance stocks should benefit most.

The Reserve Bank of Australia, which uses rate rises to slow the pace of inflation, this week conceded its official cash rate could climb sooner than its previously-flagged period of 2024, and financial markets are predicting rate rises from next year.

Baker Young managed portfolio analyst Toby Grimm said his firm had researched the impact of rising rates on stockmarkets over 30 years and found that shares benefited from higher prices, revenues and profits.

“It’s a little counterintuitive, but markets do quite well if interest rates rise,” he said.

“The last eight times we had a significant upward swing in rates, markets have outperformed their long-term average.

Resources stocks should benefit from higher inflation. Picture: Rebecca Le May

“Yes, costs go up, but as a whole the market is profitable.”

Mr Grimm said banks tended to perform well at this point of the interest rate cycle.

Perennial Value Australian Shares Trust portfolio manager Stephen Bruce said higher interest rates gave banks bigger profit margins, while commodity prices often outperformed when inflation was rising.

“The insurance sector is also a net beneficiary of higher interest rates,” he said.

“Insurance companies hold very large investment portfolios and higher interest rates mean that they earn more on their investments.

“Given the low starting point, any rise in rates is still likely to see them remaining low by historical standards. If inflation and interest rates – which tend to go hand-in-hand – rise too far, then this will have implications for growth in the real economy and would be negative for markets overall.”

Fairlight Asset Management portfolio manager Ian Carmichael said the historic “sweet spot” for shares was stable inflation between 1 and 5 per cent, and currently levels were within this range. In Australia underlying inflation has just climbed above 2 per cent.

“The risk to share markets is when inflation gets into the high-single digit range as this has historically been associated with negative real share market returns,” Mr Carmichael said.

He said businesses that operated online marketplaces could do well from rising inflation because as the value of products sold in the marketplace inflated, so did their revenues.

Analysts say goldminers could benefit because gold is traditionally seen as a hedge against higher inflation.

BetaShares chief economist David Bassanese said rising rates and inflation would constrain stockmarket returns in the year ahead.

“The good news, however, is ongoing economic recovery from the Covid crisis should support solid growth in corporate earnings and dividends, resulting in still positive equity returns – albeit not as strong as we’ve seen since March last year,” he said.

Banks book bigger profits when interest rates are rising. Picture: Sarah Matray

10 STOCKS TO WATCH

BHP – Commodity prices climb in periods of rising rates and inflation.

ANZ – Banks benefit because they can build in bigger profit margins on their loans.

Santos – We’ve seen oil and gas prices rising strongly, which is good for energy producers.

Computershare – Sits on billions of dollars of companies’ cash and will enjoy rising interest income.

QBE – Insurance companies have large investment portfolios.

Independence Group – Produces traditional metals but also lithium that’s linked to the surge in electrification.

BNKS ETF – This exchange traded funds owns a portfolio of global banks that should have rising profits.

Northern Star – The goldminer is lower risk than many and offers exposure to rising gold prices.

QANTAS – Improving economies should send more people travelling, which is good for airlines.

Microsoft – One of the global tech giants that have huge market power and rising earnings.

Originally published as Stockmarket winners from rising inflation and interest rates