Top broker picks 6 stocks to own as interest rate rises

Interest rates are set to go much higher over the next year or two and that is generally bad news for stocks. However, there are six stocks that Deutsche Bank thinks will outperform in the higher rates environment.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The world's biggest interest rate party is rapidly winding down as central bankers from around the globe have removed the punch bowl – or at least the alcohol – from the dance hall. Record low interest rates and several bouts of quantitative easing have left several major stock indices dancing near record or multi-year highs, and this includes our S&P/ASX 200 (Index:^AXJO) (ASX: XJO).

The US and Canada have already started lifting rates off record lows and other central bankers like those from the UK and EU have made hawkish comments about following suit. The Reserve Bank of Australia seems to be in no rush to hike but just about every economist believes the next move it makes will be up.

The threat of higher interest rates leaves equities vulnerable to a pullback. Rising cost of debt will slow business growth and increase the discount rate that analysts use to value stocks.

However, a higher interest rate environment probably won't bring this bull market to an end. After all, rising interest rates are a direct response to the improving global economic outlook and that should be more than enough to offset the brakes rising rates are putting on stock valuations.

On the other hand, some stocks are better placed to thrive as credit conditions tighten, while others are set to lag. Deutsche Bank warns that "yield stocks" are likely to suffer further – especially infrastructure and utilities that have rallied to record highs over the past month.

The broker didn't name names, but I can't help but think of airport operator Sydney Airport Holdings Ltd (ASX: SYD) and energy infrastructure business AusNet Services (ASX: AST).

Deutsche also believes that "value stocks" will outperform "growth stocks" as higher discount rates tend to hurt growth stocks more and stocks that trade at attractive valuations often perform better as rates start rising. Growth stocks refer to companies that are forecast to deliver profit growth rates that are in excess of the wider market, while value stocks are those that trade at a discount to their peer groups (e.g. a lower price-earnings multiple).

On that basis, the broker is recommending investors buy electrical and furniture retailer Harvey Norman Holdings Limited (ASX: HVN), insurer QBE Insurance Group Ltd (ASX: QBE), property group Stockland Corporation Ltd (ASX: SGP), fertiliser supplier Incitec Pivot Ltd (ASX: IPL) and two of the Big Four banks – National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

If you are looking for other stocks you should be buying right now, click on the link below to see the three large cap gems that the experts at the Motley Fool have uncovered!

Motley Fool contributor Brendon Lau owns shares of National Australia Bank Limited and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited and Sydney Airport Holdings 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »