Some of the best defensive stocks are tumbling down today. Transurban Group's (ASX: TCL) share price is down 1.31%. Sydney Airport Holding Ltd's (ASX: SYD) share price is down 1.2%.
Other defensive shares are down too, like real estate investment trusts (REITs). Scentre Group (ASX: SCG) is down by 2.03%. Rural Funds Group (ASX: RFF) is down 2.62%. Goodman Group (ASX: GMG) is down 0.51%.
Healthcare shares are also taking a bit of a hit. Ramsay Health Care Limited (ASX: RHC) is down 0.6% and Healthscope Ltd (ASX: HSO) is down by 0.5%.
All of this has happened because the United States Federal Reserve raised its interest rate by 0.25% to 1.75% today. That doesn't seem like a big deal, but it is. The closer the rate gets to a yield where income seekers would prefer US bonds the more likely those investors are to dump 'safe' shares like infrastructure stocks, REITs and healthcare stocks.
Another issue for the above industries is that most of those businesses carry a lot of debt. A majority of the debt may be fixed at a certain rate for now, but eventually it will cost more. The interest rate going up by 0.25% (and a further 0.5% this year) could see the interest expense for those businesses increase by 5%, 7.5% or more depending on the current rate they are paying to lenders.
An increasing interest expense means a lower profit. But, investors may also not be willing to pay a higher multiple of earnings compared to a few months ago. This, theoretically, could bring valuations down even lower.
Foolish takeaway
It may worth considering paying extra attention to these sectors because if they keep dropping they could actually represent good value. After all, the underlying businesses are still growing at a good rate.
