Navigating rising interest rates: Top Australian stocks to watch

I'd call these stocks opportunities!

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High interest rates hurt the valuations of a number of Australian stocks, particularly ones that are asset-centric and/or have a lot of debt. Some of these ASX share names may benefit when interest rates fall.

The investing great, Warren Buffett, once said about interest rates:

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.

I wouldn't invest in a business just based on the expectation of lower interest rates. Rates could stay above 4% for longer than some investors are expecting. But, I think rates are probably going to start falling in Australia within 15 months from now. I'm going to tell you why I like these stocks.

Scentre Group (ASX: SCG)

Scentre is the owner of Westfield shopping centres in Australia and New Zealand.

A massive asset play like this one could really benefit from lower rates. But, lower interest rates could also mean households have more money in their budgets to spend on retail, which could help increase sales within the shopping centres and lead to growth of rent (and the underlying value of Scentre).

The Australian stock also has a solid distribution yield, which is a useful form of return in the shorter term. Its distribution for 2023 is expected to be 16.5 cents per security, which would be year over year growth of 4.8%. At the current Scentre share price, that represents a distribution yield of 5.5% from the ASX share.

At 30 September 2023, it had an occupancy rate of 99.1%, which is a strong level. It also had average leasing spreads of 2.9%, which is a decent improvement to the rental amount.

Macquarie Group Ltd (ASX: MQG)

Macquarie is Australia's largest investment bank, with a number of divisions, including banking and asset management.

I think Macquarie is one of the highest-quality Australian blue-chip stocks, with its global operations giving it widespread growth opportunities.

The value of the assets that it manages in its asset management division plays a critical factor in its management fees. If the value of the assets goes up (for example) 10%, then Macquarie's management fees could rise 10%.

In the banking division, lower interest rates could increase demand in Australia for credit/debt (from both households and businesses), which could grow Macquarie's lending book and reduce the risk of arrears and bad debts increasing.

Lower interest rates could help boost Macquarie's underlying profit as well as be a tailwind for the Macquarie share price.

APA Group (ASX: APA)

APA owns a vast asset base of gas-related assets, including a national gas pipeline that transports half of the nation's usage. It also has a growing portfolio of electricity transmission and renewable energy generation.

I think energy will remain important in the Australian energy system for many years. Over time, APA may be able to transform its gas pipelines to carry hydrogen, either as a blend or perhaps in its pure form.

The business has been steadily growing distribution in consecutive years for almost two decades. In FY24, its distribution yield is expected to be roughly 6.5%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Apa Group and Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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