Higher interest rates means more profits for banks and less for companies with high debt levels. Prefer banks, avoid REITs and Telcos.
- On 14 Dec 2016, Fed raises its rates – the second in a decade.
- But its dot plot indicates 3 hikes every year from 2017 to 2019.
- Monetary policy has turned the corner. The US labour market is at full capacity and wages are trending higher.
- Fed will turn increasing hawkish to guard against inflation.
When interest rates go up
- Banks will earn higher interests. Insurance will become more profitable.
- But most other companies will pay higher interest expense.
How to invest?
- Prefer: banks (earn higher interest), Insurance, Venture (exports to US where economy is improving)
- Avoid: REITs and Telcos (high debt levels mean higher interest payments, less attractive yield spread)