Sectors which can Defy the High Interest Rate Environment

We recently witnessed a huge meltdown in the stock markets because of sudden spike in benchmark 10Y US Govt bond yield.  Whether this higher Bond yield will sustain for longer term, it is of anybody’s guess.

In the rising interest rates environment, both businesses and consumers suffer and both will be forced to cut back their spending. This will lead to fall in the bottom-line of the company. Stock price react negatively to such development and thus stock price will drop. On the contrary, in the falling interest rates environment, consumers and businesses will increase spending, causing stock prices to rise further.

But higher interest rate is not a bad news for all sectors. There are quite a few sectors which flourish in the higher interest rate environment. So, it is quite imperative to understand, which sectors are likely to sail through the higher interest rate environment.

Usually, Banks, diversified financials and semiconductors are expected to do well during the higher interest environment.

If we go back into the history, then we will find that there are two industries which have outperformed S&P500 benchmark index return on majority of the occasions during higher interest rate environment since 1945.

Those two industries are – Technology (on 63% of such occasions) and Industrials (on 74% of such occasions). Though, average relative return of Technology and Industrials was 5.4% and -1.6% respectively.

Energy and Healthcare sectors outperformed S&P500 on 58% of the occasions each. Average relative return of these two sectors have been 0.2% and 2.3% respectively.

Utilities and Financials are those two sectors which have under-performed Vs S&P 500 return on majority of the occasions. Both of these 2 sectors outperformed S&P 500 only on 26% and 32% of the occasions.  

Having said this, I must also say that each inflationary environment or high interest rate regime is unique, so we also need to review the inherent reasons behind the prevailing inflationary environment in the economy.

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Published by Amit

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