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%.
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.
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.
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Returns As of 6th October 2020
Motley Fool contributor Tristan Harrison owns shares of HEALTHSCPE DEF SET, Ramsay Health Care Limited, and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Sydney Airport Holdings Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited, 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.