As widely expected, the Reserve Bank of Australia (RBA) has increased the interest rate again by 25 basis points to 4.35%.
While the hike has fuelled angst in many sectors of the economy, there is a swathe of ASX shares that are benefiting from the higher interest rate environment. Certainly, they could be interesting investments to consider.
I like taking advantage of ASX share valuations that have fallen. But there's also the potential for a handful of names to actually make greater returns because of the higher rate environment.
The current prices need to make sense, but I like the look of these three ASX shares.
Betashares Australian High Interest Cash ETF (ASX: AAA)
This is an exchange-traded fund (ETF) that gives investors exposure to Australian cash deposits with "attractive monthly income distributions that exceed the 30-day Bank Bill Swap Rate (BBSW) (after fees and expenses)", according to the fund. Its annual fee and costs are 0.18% per annum.
The ETF is invested in deposit accounts held with select banks in Australia. However, note that — unlike bank deposits — this investment does not receive any government guarantee. At the moment, some of the fund's banks include National Australia Bank Ltd (ASX: NAB), Bendigo and Adelaide Bank Ltd (ASX: BEN), and Bank of Queensland Ltd (ASX: BOQ).
At the time of writing, the interest rate earned on the AAA ETF's deposits, net of costs, was 4.19% as at 7 November 2023. I suspect the RBA's latest move will increase this rate of return.
Insurance Australia Group Ltd (ASX: IAG)
IAG is one of the largest insurers in Australia, with a number of brands including NRMA Insurance, CGU, SGIO, SGIC, Swann Insurance, WFI, and Lumley Insurance.
The ASX share is benefiting from a number of different factors at the moment. Widespread inflation is helping the company pass on strong premium increases. If IAG's margins don't change, then an increase in revenue should lead to a boost in the company's net profit after tax (NPAT).
As well, a change in the weather pattern from La Nina (wetter with regular damaging storms) to El Nino (drier) may also help the company's profitability.
Where do higher interest rates come in? IAG invests the premium money it receives until it's needed to be paid out. A substantial portion of that is invested in assets that generate interest, so a higher interest rate should translate into stronger interest earnings for IAG.
Computershare Ltd (ASX: CPU)
This ASX share provides a variety of different services including share registry, employee equity plans, stakeholder communications, corporate governance, fund services, deposit protection, and mortgage servicing. It now manages over 75 million customer records with 14,000 staff.
As part of the company's operations, it holds a significant amount of cash for clients. With that, the company can earn a lot of extra income (and profit). At the time of Computershare's FY23 presentation, it said that FY24 margin income guidance was $840 million.
Since 18 October 2023, the Computershare share price has fallen by around 10% so it's cheaper at the moment and it can likely generate better interest returns after the RBA rate increase.
Foolish takeaway
I like the simplicity of the AAA ETF, particularly for people/entities who can't access the best rates offered by banks.
In a rising interest rate environment, I'd still prefer to go for ASX share investments that have fallen and could be cyclical opportunities if they rebound once economic conditions normalise. That said, the above three names look set to benefit from the higher interest rate environment.
