The Federal Reserve of the United States has steadily been increasing its interest rate for the last couple of years. Some people may have been expecting interest rates to stay low forever, but that opinion was obviously not quite right.
Global debt is now at a much higher level compared to the pre-GFC levels. Individuals, businesses and governments have loaded up on debt thanks to the low rate.
However, the US economy has been powering along. The American unemployment level is the lowest it has been for many years, the Federal Reserve doesn’t really have a choice.
The new man in charge of the Federal Reserve, Jerome Powell, wants to get the interest rate higher to a more normalised level. The Federal Reserve is expected to increase the interest rate to 1.75%. However, it’s expected to increase the rate much higher over the next couple of years to at least 2.5%, if not higher.
So, will this affect Australian shares?
I’d like to think that most investors will have seen this rate rise coming, and the Federal Reserve has signalled that it is going to increase the rate to a higher level for long time.
But, lots of Australian shares which are bond-like businesses could suffer over the next couple of years. Shares like Transurban Group (ASX: TCL), Sydney Airport Holdings Ltd (ASX: SYD), APA Group (ASX: APA) are all prime candidates for a re-rating. These types of businesses can be affected because they have large amounts of debt on the balance sheet, meaning a higher interest charge and then the earnings may be valued at a lower multiple.
This same double whammy concept can affect real estate investment trusts (REITs) too like Scentre Group (ASX: SCG), Goodman Group (ASX: GMG) and Stockland Corporation Ltd (ASX: SGP). Healthcare stocks and other defensive businesses could also be affected.
Ultimately, I don’t think Australian shares will be heavily affected tomorrow, but the next couple of years could hurt some of the shares I’ve mentioned above.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. The Motley Fool Australia has recommended Scentre Group and Transurban Group. 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 Scott Phillips.