Official interest rates are almost certain to be raised when the Reserve Bank of Australia Board (RBA) meets next week, raising the question: what does that mean for your portfolio?
Canaccord Genuity has just released a research report looking into the sectors which tend to do well, and those that tend to suffer as interest rates increase.
Image source: Getty Images
Interest rate increase all but certain
The broking house said in its report that expectations for an interest rate hike had increased sharply over the past few months due to persistently high inflation, exacerbated by rising oil prices due to the conflict in the Middle East.
CG added:
The RBA is now very likely to hike the cash rate by 25bps later this month, and markets are also pricing in one to two further hikes beyond September. While accumulating evidence of a slowing economy may allow the RBA to hold rates after September, the policy outlook is nevertheless materially more restrictive than envisaged this time last year.
The broking house said upward pressure on interest rates, a deteriorating consumer backdrop, a softer housing market and slowing economic growth all presented headwinds for Australian shares from a valuation and earnings perspective.
They added:
These pressures have contributed to a ~5% pullback in the ASX 200 since early August, with outsized declines across the rate-sensitive Retail (-18%) and Real Estate (-13%) sectors, as well as growth sectors such as IT (-14%).
CG said the sectors with the strongest negative correlations with interest rates included real estate, retail and information technology.
CG added:
Recent trading updates have pointed to a softening consumer backdrop, with names such as JB Hi-Fi Ltd (ASX: JBH) reporting negative top-line growth in early FY27. Wesfarmers Ltd (ASX: WES) has also shown a negative correlation with short-term rates, consistent with its exposure to discretionary household spending and its sensitivity to the housing market through its Bunnings franchise.
CG said online classifieds companies such as Seek Ltd (ASX: SEK) and REA Group Ltd (ASX: REA) have in the past shown strong negative correlations with rate increases, which, "partly reflects the degree of cyclicality in their earnings, being tied to job ads and property listings, respectively, as well as the valuation impact of higher long-term yields on growth-orientated companies''.
Infrastructure owners such as Transurban Group Ltd (ASX: TCL) and APA Group Ltd (ASX: APA) were also sensitive to rate increases due to their reliance on debt funding.
Small ray of hope in energy
On the positive side of the ledger, CG said energy stood out as the one sector with a clear positive correlation, "with changes in both short-end rates and longer-term yields over the past three years''.
