As reported in Fairfax media, a former Reserve Bank of Australia (RBA) board member, John Edwards, has suggested that Australia could be facing at least 8 interest rate hikes in 2018 and 2019.
He was quoted as saying that current interest rates were far too low, if the RBA’s predictions of economic growth came true. 8 interest rate hikes implies a 3.5% cash rate, compared to 1.5% currently, and interest rates on loans would likely rise in line with this. Given that higher interest rates is usually seen as bad news for share prices, should investors be concerned?
Probably the hardest hit will be companies like Sydney Airport Holdings Pty Ltd (ASX: SYD) and Transurban Group (ASX: TCL), as these infrastructure companies a) carry large amounts of debt and b) are heavily relied upon for their dividends by investors seeking income.
At today’s prices, Sydney Airport yields around 4.3% and Transurban around 4.1%. Given that investors could, in this hypothetical future, receive at least 3.5% in a savings account, Sydney Airport and Transurban shares could fall meaningfully (assuming no growth in profits and dividends) as investors shift their funds around.
Plenty of other companies like Wesfarmers Ltd (ASX: WES) will also see some investors leave for the relative safety of cash, reversing the big dividend boom of recent years. There’s few alternatives to dividend stocks for income right now, which has created unusually high demand.
Of course, that’s if the RBA’s growth predictions come true. Several economists have criticised the ‘hockey-stick’ style economic growth forecasts from the central bank, which suggest a sudden jump in GDP growth to above 3% (currently ~1.7%) within 2 years.
It’s not worth your time to try and go forecasting interest rates, however it might be worthwhile to remember that low interest rates typically result in higher share prices and vice versa. If a large part of your portfolio is invested in businesses that are heavily reliant on low-cost financing, or are unusually vulnerable to higher rates somehow, it could be worthwhile rethinking your strategy.
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia owns shares of Sydney Airport Holdings Limited and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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