ASX share investors have plenty of places and sectors to look for opportunities. But there's a curveball being thrown by interest rates.
Interest rates can affect ASX shares in at least two major ways. The first is that any business with debt is now paying (or will be paying) more to its lender(s).
Interest rate changes can also heavily impact valuations. As Warren Buffett once explained:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
How could interest rates start harming ASX share earnings?
The portfolio manager of the Ausbil Active Dividend Income Fund, Michael Price, recently gave commentary to investors that highlighted some areas of the ASX share market that could point to opportunities:
We see that higher interest rates will lead to a slowing economy and lower levels of overall earnings growth for the Australian market.
However, we see there are some pockets of opportunity where we can get superior earnings and superior earnings growth. Healthcare would be a good sector for that.
Secondly, we're looking at companies that can benefit from the higher inflation to grow their revenue, and if they can maintain their margins, that leads to some good earnings growth as well. I think the general insurers fit in that category, and probably the supermarkets will be there as well.
Thirdly, we'd be looking for companies that can benefit from what we see as one of the really big themes of the next few years, and that's decarbonisation and electrification. So, the copper producers, companies that produce battery materials, we think they can definitely exceed the market's expectations.
Which shares could fit the bill for ASX investors?
In terms of healthcare, the only name in the Ausbil dividend fund's top 10 positions at the end of June 2023 was CSL Limited (ASX: CSL) with a 6.29% weighting.
The fund manager's comments about general insurers could refer to Suncorp Group Ltd (ASX: SUN), Insurance Australia Group Ltd (ASX: IAG), and possibly QBE Insurance Group Ltd (ASX: QBE). Suncorp was the only one in the top 10 holdings of the fund.
The supermarket companies usually mean Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW).
Finally, there are a number of companies involved with decarbonisation resources including copper, with two of the main copper miners being Rio Tinto Ltd (ASX: RIO) and Sandfire Resources Ltd (ASX: SFR).
