When interest rates go up, certain industries tend to fare better than others. Foremost among them are banking, mortgage, and insurance, since they can capitalize on the higher interest rates to boost their earnings. It’s a relatively slow affair, but it may give you adequate time to get in before companies in these industries start growing under the positive influence of higher interest rates.
The U.S. Fed has announced the most aggressive hike of about three decades, and it’s bound to impact the market. And now that you know which industries experience a positive impact from the high-interest rates, it might be a smart idea to look into the cross-listed companies from these industries.
You can start tracking them to buy as low as possible and lock in a solid yield, then wait for recovery-driven capital appreciation to kick in.
A bank stock
Bank stocks benefit from the higher interest rates, as they, in turn, tend to make more money from financial products tied to their interest rates, like mortgages. And as one of the most “American” banks in Canada, Toronto-Dominion (TSX: TD)(NYSE: TD) should be on your radar. The bank is currently available at a 20% discount from its 2022 peak, and the fall has also pushed its yield up to 4.1%.
The valuation is adequately attractive, though it’s not undervalued, per se. The current momentum may take the stock further down before the new interest rates (among other factors) kickstart the bank’s recovery journey. It’s difficult to predict how far the bank stock will fall, though one potential point might be its pre-pandemic price. It’s still trading at a 13% premium to that price, so there is enough room to fall.
If you can buy at the point of recovery, you may capture the best of both worlds — a high yield and low starting point for recovery, which may result in decently high capital appreciation.
An insurance stock
Manulife Financial (TSX: MFC)(NYSE: MFC) is both discounted and undervalued. It’s trading at a price 22% lower than its pre-pandemic one, and the current price-to-earnings ratio is at 4.62. The most impressive consequence of this is the current 6.1% yield, which is a remarkable number for such a financially stable Dividend Aristocrat.
Even though capital appreciation has never been Manulife’s forte, it does have enough resilience for recovery. After the 2020 crash, it managed an almost full recovery and, in the course, rose over 99% in about a year. If the current falls continue for a few more weeks, the discount, subsequent recovery, and the yield you may be able to lock in will all be more potent than they currently are.
Foolish takeaway
The interest rates were raised in the U.S. to arrest the rampaging inflation, and ideally, its impact on the economy should be positive. But high interest rates do impact business investing and spending as well, which may have negative consequences for certain industries. They also help simmer down the housing market, and real estate stocks may suffer as a result.
