Wealth Guide: Sectors Finding Favor in an Environment of High Interest Rates and High Inflation
Wealth Guide: The sharp rise in bond yields has rattled stock markets that a post-pandemic spending spree could fuel inflation, prompting earlier-than-expected rate hikes. While moderate inflation is good for the economy, as inflation heats up, it poses a huge risk to stock markets. It’s no wonder that equities do quite well when inflation is low, as equities tend to like to walk in calm waters. But as soon as inflation heats up, things start to go wrong and stock markets tend to get volatile. Abhinav Angirish, Founder of Invest Online, shares his knowledge on sectors that find favor in high interest rates and high inflation environment:-
Abhinav Angirish said: “Higher inflation means higher interest rates. If inflation breaks out of RBI’s comfort zone, it might be forced to push interest rates higher. RBI is facing a strange situation at present, the growth rate has not yet picked up while inflation is already rearing its ugly head.Any rise in interest rates can have a catastrophic impact on the GDP growth of the India.
“However, for investors, it means adopting a strategy that can provide inflation hedging to their portfolios. Here are some sectors that can provide a cushion against rising interest rates,” he added.
“During the period of high inflation, energy stocks tend to perform better as energy is considered a key component of inflation indices. Oil and gas companies tend to perform better in a high inflation environment “, he suggested.
“Real estate is another sector that offers a hedge against inflation. Investors can invest in REITs (Real Estate Investment Trusts) as a hedge against inflation. price increases in rental contracts and real estate prices,” he said.
He further said: “The financial sector tends to perform better in a high interest rate environment because its cash flows tend to be concentrated in the short term. For banks, it’s a double whammy. , because higher inflation erodes the present value of existing loans that will be repaid in the future.”
“Utility stocks are another sector where investors can bet their money in rising interest rate scenarios. They have a stable nature of business and are often traded like bond substitutes. by the nature of their business, they are able to pass the cost on to consumers.. However, these companies face regulatory hurdles,” he advised.
“Insurance stocks can also thrive in a rising interest rate environment. In fact, the relationship between interest rates and insurance companies is linear, meaning the higher the rate, stronger growth Insurance companies and stable cash flow, and improved consumer sentiment means more car purchases and improved home sales, which means more policy writing “, did he declare.
“As Consumer Discretionary – Auto, white consumer goods are supposed to be in an up cycle when the economy is growing. At the initial stage of rising interest rates, the consumer buys more, which is also beneficial for this sector. As an investor, one should constantly monitor his portfolio and rebalance as soon as the need arises. Better to seek the advice of a qualified financial adviser before making hasty decisions”, a- he concluded.
(Disclaimer: Opinions/suggestions/advice expressed here in this article are investment experts only. Zee Business suggests its readers consult their investment advisors before making any financial decisions.)