Wealth Guide: Sectors that find favours in high-interest rates and high-inflation environment

Wealth Guide: The sharp rise in bond yields has rattled equity markets that a post-pandemic spending splurge could fuel inflation, thereby prompting rate hikes earlier than anticipated. While moderate inflation is good for the economy, as inflation heats up, it poses a tremendous risk for equity markets. It is no wonder that equities perform quite well when inflation is low since equities tend to like to tread in calm waters. But as soon as inflation heats up, things begin to turn ugly, and equity markets tend to become volatile. Abhinav Angirish, Founder, Invest Online, shares his knowledge on the sectors that find favours in high-interest rates and high-inflation environment:- 

Abhinav Angirish says, "Higher inflation means higher interest rates. If inflation goes beyond RBI's comfort zone, it may be forced to nudge interest rates higher. RBI is facing an odd situation at present, the growth rate has yet to pick up while inflation is already rearing its ugly head. Any hike in interest rates can have a catastrophic impact on India’s GDP growth."

"However, for investors, it means adopting a strategy that can provide an inflation hedge to their portfolios. Here are some sectors that can provide a cushion against rising interest rates," he added.

Energy Stocks

"During the high inflation period, energy stocks tend to perform better because energy is considered a key component of inflation indices. The oil and gas companies tend to perform better in a high inflation environment," he suggested.

Real Estate

"Real estate is another sector that provides a hedge against inflation. Investors can invest in REITs (Real Estate Investment Trusts) as a hedge against inflation. The price rise is passed on to the consumer via the pass-through of price increases in rental contracts and property prices," he opined.

Financial Sector

He further said, "The financial sector tends to perform better in the high-interest environment as their cash flows tend to be concentrated in the shorter term. For banks, it's a double whammy since higher inflation erodes the present value of existing loans that will be paid back in the future."

Utility

"Utility stocks are another sector where investors can bet their money in rising interest rate scenarios. They have stable nature of business and are often traded as proxies to bonds. Due to the nature of their business there able to pass on the cost to the consumers. However such businesses open face regulatory hurdles," he advised.

Insurance

"Insurance stocks can also flourish in a rising interest rate environment. In fact, the relationship between interest rates and insurance companies is linear, meaning the higher the rate, the greater the growth. Insurance companies and steady cash flows, and improving consumer sentiment mean more car purchasing and improving home sales, which means more policy-writing," he said.

"As consumer discretionary - Auto, white consumer goods are supposed to be in up-cycle when the economy is growing. At the initial stage of rising interest rates, the consumer buys more hence beneficial for this sector as well. As an investor, one must constantly monitor his portfolio and re-balance as soon as the necessity arises. It is better to seek the guidance of a qualified financial advisor before making hasty decisions," he concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)