Where to invest with interest rates rising

On Tuesday, the Reserve Bank of Australia (RBA) raised the official cash rate to 4.35%. 

As reported by Bernd Struben, Australia’s official interest rate is now back at its post-pandemic 2024 highs.

November 2011 was the last time rates were higher than the current level. 

The decision from the RBA was influenced by inflation and the ongoing conflict in the Middle East. 

The RBA said:

In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen.

Why this matters for investors 

As a quick refresher, the RBA cash rate acts as a benchmark for the Australian economy. 

When the cash rate rises, borrowing becomes more expensive for businesses and consumers. 

This can slow economic activity and reduce company profits, often putting downward pressure on share prices. 

On the flip side, when the cash rate falls, borrowing is cheaper. 

This can stimulate spending and investment, which can boost corporate earnings and generally support higher share prices. 

In this way, changes in the cash rate influence both company fundamentals and investor behaviour across the ASX.

For the everyday Aussie, changes in the cash rate affect how much they pay on mortgages, loans, and credit cards. 

This has a direct influence on spending power and the overall cost of living.

But it isn’t bad news for every ASX-listed company when interest rates are high. 

Here are some options for investors looking for companies that could stand to benefit from a high-interest-rate environment. 

Big banks

Banks make much of their profit from the difference between:

• the interest they charge borrowers (home loans, business loans), and
• the interest they pay depositors and wholesale lenders

This difference is called the net interest margin (NIM).

When the Reserve Bank of Australia raises rates, banks usually increase mortgage and business lending rates fairly quickly, but deposit rates often rise more slowly.

That can widen margins and increase profits.

This (not always) can mean bank shares like the big four can benefit in a high-interest-rate environment. 

Investors may choose to target these banks individually. However, another option is to target an ASX ETF that includes all the big four bank shares. 

One such option is the VanEck Australian Banks ETF (ASX: MVB). 

Insurance companies

Another subsector of the ASX that can outperform in high-rate environments is insurance shares. 

These companies can benefit from interest rate rises because they invest premiums and earn more when yields rise. 

Some options include: 

• QBE Insurance Group Ltd (ASX: QBE)
• Suncorp Group Ltd (ASX: SUN)
• Insurance Australia Group Ltd (ASX: IAG)

The post Where to invest with interest rates rising appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Bell 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.