“Getting back to a more normal situation is good for the economy and while it may hurt these growing businesses, it will be a big blow to value and quality businesses,” Dive said.
His fund focuses on buying shares in banks and infrastructure. “These are companies with strong earnings and companies that can grow their profits regardless of inflation,” he says.
“For the banks, the rate hike will be better because I would be surprised if they pass on term deposit rates quickly to customers, but they will likely pass on mortgage rates right away.”
Other fund managers agree that banks are likely to provide safety in a global cycle of rising rates.
“Cash rates go up faster and that’s great for bank margins,” said William Curtayne, portfolio manager at Milford Asset Management.
“We think bank stock prices have incorporated the buybacks somewhat, but they haven’t incorporated the earlier spot rate hike and widening of their margins.”
Banks rebounded strongly in the first quarter of the year, but leveled off in the second quarter, reflecting a similar performance in domestic bond yields.
But if rates start to rise again, banks should be well positioned, even in an expensive market.
“They’re slightly higher than the P / E multiples they’ve had historically, but they’re extremely attractive compared to the rest of the market,” Curtayne said.
“We have record valuations around the world and banks, on a relative basis, therefore look cheap. There is still a reasonable return on them too, especially with our view that their profit momentum will continue. “
Professional investors warn that it may not be easy to navigate the market, given that the bond market’s reaction has been unexpected.
“Part of the problem is we don’t know what a bond rate tightening looks like,” Curtayne said. “The Fed’s first hawkish move actually caused US bond yields to drop rather than rise as we normally would expect. “
Year of recovery
Wilsons is also looking to the big banks and favors cyclical stocks over defensive or growth stocks.
“We still believe that a cyclical recovery in business activity and corporate earnings is ahead. Australian earnings haven’t fully recovered to FY19 levels. It’s probably FY22, ”Wilsons analysts say.
“Increasingly, profit recovery increasingly depends on the actual deployment of longer-term stimulus measures or the widespread adoption of vaccines for service industries like education, entertainment, tourism and trips to reopen.
The broker does not believe the cyclical recovery is over despite its strong progress over the past few months.
“Our baseline scenario remains that 2021 is a year of COVID-19 recovery for corporate profits. It won’t be until 2022 or 2023 that many companies’ earnings will surpass FY2019 levels, suggesting that we still want to overweight companies exposed to cycles, ”Wilsons analysts say.
We think the market is generally a bit tight in a number of areas.
– William Curtayne, Portfolio Manager of Milford Asset Management
“Additionally, while we may be entering stage 2 of the recovery, we are still far from calling the mature cycle. Bond yields are expected to partially normalize to higher levels in the fourth quarter of 2021 or first quarter of 2022, and ultimately implies that value and cyclically exposed sectors may still be doing well until the end of 2021. “
The broker is overweight ANZ, NAB and Westpac and recently added IAG to its preferred stock list.
Curtayne acknowledges that there are many areas of the market that seem expensive, which means investors need to be careful. “We think the market is generally a bit tight in a number of areas,” he says.
“You can come up with a positive scenario for resources, but when we’re looking for a general risk-return investment, banks get to the top of the pile pretty quickly.
“Companies like Woolworths, Wesfarmers have been very successful and they’ve run off pretty hard, so they’re just not really asking for your dollar at these prices.”
Dive says real estate stocks are likely to be better protected against rising interest rates than they were after the global financial crisis.
“A little over a decade ago, they were in debt within a year or two and in that situation raising rates is not a good thing,” he says. “What we have seen now is [property stocks] have gone into the private US market and their terms are set over a much longer period.
“There will be some impact on valuations, but earnings should look okay. Rents go up but the price of debt for these guys doesn’t go up because of the way they’re structured.