This week, the Reserve Bank raised interest rates from 0.1% to 0.35%.
Some economic “experts” now predict an increase in official interest rates to 2-3% in the coming years.
Interest rates are like gravity. The higher they rise, the faster things fall.
The reality is that the higher the interest rates, the faster some stocks, bonds and real estate will fall.
However, this is not all bad news for investors. There are ways to avoid or overcome rising interest rates.
Below I offer 5 steps for equity investors …
Here is a checklist of 5 steps to avoid deteriorating your portfolio with interest rates.
1. Avoid companies with high debt.
Companies with large amounts of debt face higher interest rates and the cost of financing their loans, so they will suffer. Try to avoid companies that will depend on bankers for the next few years to stay in business.
2. Avoid unprofitable companies.
Keeping some unprofitable companies can be fine, provided they are sustainable but don’t hold too much. I recently told Rusk Invest members for the sale of business terminals Payments Tyro (ASX: TYR) and we put the sales rating of the HR company RightCrowd Ltd (ASX: RCW). Loss companies have suffered more than profitable ones because, like debtor companies, they are not self-sufficient and will eventually take extra money to fund their operations. Higher rates make it more expensive.
3. Avoid companies that do not have pricing options.
If a company faces higher costs for its products (such as production costs or wage inflation) and it cannot pass these additional costs on to customers, its profits will be compressed. Companies like Microsoft (NASDAQ: MSFT) have the power of pricing because know that your employer will never give up Microsoft Excel.
4. Avoid companies with weak growth.
I recently put a BIG GREAT SELL rating Dubber Corp (ASX: DUB) promotions for Rusk Invest because I strongly doubt the true growth potential of the company. Excluding acquisitions, Dubber is growing much slower than investors expect. The reason you want growth in your portfolio is that companies can often overcome short-term challenges – and turn a downturn into an opportunity. Amazon (NASDAQ: AMZN) did this during Covid.
5. Buy companies that trade at a really good price.
Over the last 10 years it has been so difficult to find high quality companies that trade at a good price. But thanks to falling prices we may now be able to find and own these rare animals – through ETFs or directly. For example, ARB Corporation (ASX: ARB) may still be too inflated to my liking, but thanks to a 10% drop yesterday, ARB shares are now moving in the right direction for investors.
Seems like a pretty easy plan with 5 points, right? You should be able to identify each of these 5 factors using publicly available data.
And what’s the worst thing that can happen if you follow the instructions? Even if interest rates don’t rise as fast and not as fast as “experts” predict, at least you’ll have a pretty impressive portfolio of companies.
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