Why equity investors should not be afraid of rising interest rates

Rising interest rates are raising a red flag in the stock market, but analysts say we need to be prepared, not be afraid.

For now, interest rates are rising with the idea that inflation will also rise. But the warning at the moment is probably more like a smoke alarm from a burnt dish than a burning house.

Yields on the way up

Bond professionals say yields have risen and are rising for several reasons.

One big factor is the fiscal stimulus, the $ 900 billion approved in December, and the $ 1.9 trillion plan that is now making its way through Congress.

Better growth is expected because of federal money, but it also leads to more debt and potential inflation. This is another reason for higher profits.

Emanuel of BTIG said he would be concerned if 10-year yields began to rise. He expects it to reach 1.7% by the end of the year.

However, if they move too fast, stocks may reach a zone of resistance. For example, the dangerous level is about 1.35% if the 10-year yield reaches it this month.

The so-called steeper curve helps banks make money, as they can borrow at very low short-term interest rates and lend at higher interest rates for longer periods of time.

Bank of America analysts say energy and technology hardware are among the sectors that could be affected by rising interest rates.

Stock dividends vs yields

Analysts say that the return on securities, although rising, is far from the levels at which they compete with stocks.

An analyst said it was monitoring the number of companies in the S&P 500 that pay dividends over 10 years of profitability. At the beginning of the year, 63% of S&P 500 companies had dividends above the 10-year yield, and a few weeks later they were 56%.

Rising rates and inflation trading are largely rotations that began in the second half of last year, as vaccine news was positive and investors began to expect a more normal economy in 2021.

Measures against inflation

Inflation expectations are rising, but still low.

RBC’s Calvasina said that as interest rates rise and inflation expectations rise, investors must stick to trading with reflation.

Reflation trading is when investors bet on companies that will do well when the economy improves and reopens. This includes airlines, financial institutions and industrialists.

Energy may rise by more than 15% as oil prices rise this year, but other cyclical sectors, such as materials and industry, have increased by only about 2% since the beginning of 2021.

Areas of growth in technology and communications services can be used as a source of funding for rotation, as they are doing well, Calvasina said.

Jonathan Golub, a major US shareholder in Credit Suisse, said he did not expect technology to be affected by rising interest rates. But stocks to buy in this environment are among the “most addictive.”

“I don’t think technology will choke.” I think the better way to look at this is who benefits the most from an improving economy. The answer is cyclical companies and companies that have a business problem, “he said. “You want someone who is on the brink, with less capacity, companies that have a lot of debt.”

Golub also said that rising stock yields are also positive for the market, as they represent an improving economy.

“The most stimulating event in the history of the planet will not be the end of the First World War, the end of the Second World War, it will be the resumption of the economy this summer,” Golub concluded.


 Junior Trader Mert Mustafa

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