Consider Cyclical Stocks to Ride Out the Rate Regime Change
Fallout from Greece Just 1 Issue Awaiting US Equity Investors
Advice for investors
For equity investors, there are three key takeaways:
1.Look closely at technology and other cyclical companies, which tend to hold up better during periods of rising interest rates.
Market Realist: Consider cyclical stocks as interest rates rise.
It’s well established that mature technology companies have stacked up a lot of cash. In fact, technology companies possess close to half of the total corporate cash reserves in the US. Combined, Apple (AAPL), Microsoft (MSFT), Google (GOOG), and Cisco (CSCO) account for a staggering ~$413 billion, $194 billion of which can be attributed to Apple. This would be enough to distribute $600 to every American.
The first graph shows the amount of cash held by some of the biggest technology companies. This cash could be used for either dividend distribution or investment in research and development. This financial stability should permit tech stocks (IYW) to navigate a phase of higher interest rates with greater ease.
What’s more, the technology sector has one of the lowest debt-to-equity ratios of any other sector, as you can see in the second graph. Debt-to-equity ratio is a measure of a firm’s financial leverage. A high ratio generally means that a company has aggressively financed its growth with debt. While higher leverage can magnify earnings, it can put a squeeze on margins as interest rates rise.
This gives mature technology stocks a lot of leeway, and makes them better placed than other sectors, especially the utilities, to ride out the rate regime change.
Meanwhile, financials (XLF) also appear to be an interesting investment choice at this point. The Fed’s ultra-accommodative monetary policy had an adverse affect on banks (KRE). Extremely low interest rates put pressure on banks’ net interest income–an important metric that’s used to assess a bank’s performance–as borrowing costs can’t be less than 0%. This has caused the net interest margin to dip since 2010. So increasing interest rates would improve the profitability of banks.
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