Big chance to buy ASX share that benefits from rising interest rates: expert

Smiling man sits in front of a graph on computer while using his mobile phone.Smiling man sits in front of a graph on computer while using his mobile phone.

One ASX shares expert has warned investors that there is a golden opportunity now to buy a stock that’ll cash in from rising interest rates.

The Reserve Bank of Australia elevated the cash rate by 25 basis points last month, to take it to 0.35%.

More hikes are expected to come, to suppress inflation.

According to the ASX, on 1 June the local market had a 75% expectation that the RBA will push its rate up to 0.75% at its next board meeting on Tuesday.

In the longer term, experts are forecasting the rate may hit 2% by the end of this year, or 3% by the end of 2023.

Why Computershare loves higher interest rates

So considering all this, it’s critical now to buy ASX shares that will tolerate interest rate rises.

A stock that multiple experts have named as one that will not just put up with, but thrive with, higher rates is Computershare Limited (ASX: CPU).

The idea is that the share registry business holds a significant amount of funds in the form of dividends and distributions that are yet to be paid out to shareholders.

Computershare earns interest on that capital, which goes straight to the bottom line.

“At the 1H22 results release, the company disclosed that a 100 basis points increase in interest rates on the exposed average balances as at 31 December 2021 would generate an annualised EPS [earnings per share] increase of 26 US cents per share,” Fairmont Equities managing director Michael Gable said on his blog.

“This is significant given that EPS guidance for FY22 is for 57 US cents per share.”

This margin income will more than compensate for the inflation in wage expenses for Computershare, he added.

“We do not expect that the potential for higher-than-expected inflation presents a risk for either FY22 guidance or FY23 earnings, especially given the strengthening outlook for margin income.”

Why now is the time to buy Computershare shares

So that’s all well and good, but it’s not a massive secret that Computershare is about to enjoy increased earnings from higher rates.

That’s why the stock price has risen a stunning 46% over the past 12 months, during a time when most ASX shares outside mining and financials have suffered.

But Gable is convinced now is a nice dip to buy Computershare.

“The recent pullback from the April high has been fairly orderly and the share price is back at support,” he said.

“As long as the broader market can hold up here, we would view current levels as a buying opportunity.”

Indeed, the Computershare share price has cooled down 10.5% since 19 April.

Despite the spectacular rise in valuation over the past year, Gable believes there is still plenty of demand from investors looking for increasingly rare returns.

“We expect the shares to eventually be supported by Investors seeking such an exposure as a portfolio hedge… [and] the potential for higher-than-expected margin income to offset cost pressures,” he said.

“[There’s] potential for M&A/capital returns as a result of a lower forward gearing profile.”

The post Big chance to buy ASX share that benefits from rising interest rates: expert appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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