The Reserve Bank raised the cash rate this month, and is expected to do so again multiple times this year.
Most sectors and businesses would find this situation detrimental to earnings.
After all, money becoming more expensive makes it harder to borrow to grow or operate, and it takes away available capital from potential investors.
It’s already well-publicised that bank ASX shares will be rare winners in such an environment.
Banks will simply pass on each rate rise in full to its loan customers, and only pass it on partially to deposit clients. This easily increases their net interest margin.
But there are other businesses, believe it or not, which could benefit from higher interest rates.
A pair of experts recently named two such non-bank ASX shares that you may consider buying:
40% upgrade in earnings as rates rise
Tribeca portfolio manager Jun Bei Liu told a Livewire video that she knows of a bunch, but the pick of them would be Computershare Limited (ASX: CPU).
“That’s the number one beneficiary of higher interest rates,” she told a Livewire video.
Liu said that, for many investors, the link between a share registry business and higher interest rates may not be obvious.
“Well, they hold a lot of cash, so their earnings are actually extremely sensitive to high rates. With every 50 basis-point increase, their earnings will lift by double digits.”
She admitted that the effect will take a while to kick in, due to residual hedges that Computershare had put in to survive the zero-interest pandemic era.
“But earnings are going to be significantly upgraded,” said Liu.
“Even at the current spot or consensus expectations for the bond yield, this company’s earnings could be upgraded somewhere between 30% to 40%.”
Light at the end of the tunnel
TMS Capital portfolio manager Ben Clark’s surprise interest rate winner is annuities provider Challenger Ltd (ASX: CGF).
He admitted it’s a company that’s had issues in recent years.
“To be honest, it’s been one I’ve got wrong in the past. This company was blown apart, particularly by the Royal Commission,” he said.
“It’s effectively Salesforce Inc (NYSE: CRM) with financial planners pushing their products, particularly bank-employed financial planners. But it was also impacted by the move in cash rates to zero. Annuities don’t sound particularly attractive when you’re locking in a 1% rate for the rest of your life.”
But during that period of turbulence, Clark feels management has reformed the business, moving away from retail products.
“It’s [now] much more closely aligned to institutional solutions for annuities, particularly things like inflation linked to annuities and more boutique solutions to problems in big LICs [listed investment companies].”
With this transformation, Clark reckons “there’s earnings momentum coming back”.
“For the first time in what feels like years, we’ve also seen the financial advice industry start to calm down,” he said.
“I think the retail side will start to pick up once you can start to lock in much more attractive yields.”