In this article, we will talk about the list of stocks and the sectors which have a direct impact on the stock price movement based upon the interest rate changes.
In our past article, How Interest rates affect stock prices, we have explained the how the share prices move in case of interst rate changes - the article carries quite a few good examples for anyone to understand the share market performance and its interest rates dependency.
Continuing further, our focus in this article will be to highlight only those stocks, shares and industry sectors, which are heavily dependent on interest rate price fluctuations. So let's begin with the list of Interest rates dependent stocks and shares.
List of stocks and sectors with dependency on interest rate changesFirst, let us look at the root cause of this topic - why should you worry about any share, stock or industry sector being dependent on interest rates? Basically, its your money. You are investing it in stocks and shares, and acros various industry sectors. The returns generated by fluctuating share prices depend upon lots of micro and macro-economic factors and interest rates is one of the prime factors for that. Hence, it is good for any individual trader or investor to know about dependency of stock prices and their sensitivity to interest rate changes. So let's start with the list.
The first on the list of Interest Rate Sensitive Stocks & Sectors is the Banks and Financial Industry Stocks, for obvious reasons. Now, it sounds obvious to keep banks and financial institutes at the topmost position, but in my personal opinion it is something that needs to be looked upon properly.
Banks work on simple principle - collect money from depositors in form of savings (at a lower interest rate) and offer loan to borrowers (at a higher rate) and keep the differential as profit. So, as and when any interest rate changes occur, banks and financial institutions are expected to be hit first. However, it needs a rethink. When interest rates rise, the banks usually increase both the lending rates as well as the deposit rates. Usually, the deposit rate increase is less compared to the lending rate increase, which again goes in favour of the bank. Hence, although there are minor drop in the bank index or overall banking and financial sector share prices, due to this increase being applied to both lending and deposit rates, banks dont suffer that much. Hence, if the fundamentals of the banks are strong, then such increase in interest rates can offer good buying opportunities to investors, with a long term view.
But you need to be careful about the overall business scenario as well - in case the macroeconomic interest rates go really high, then there is less liquidity in the market as people spend less. Hence, even bank stock may not perform that well, despite the deposit and lending rate differential.
The second on the list of Interest Rate Sensitive Stocks & Sectors is the Real Estate Sector and Property Stocks, like those of construction companies or infrastructure development companies.
The reason for this real estate sector being impacted depends upon the country's economic status. If the real estate market in a country is such that people can buy property only by taking a loan (because of high property costs), then this real estate sector gets very much affected by the interest rate changes. If interest rates increase causing costly loans, then demand for real estate (usually purchased on loans) go down. This leads to a fall in real estate share prices. On the other hand, for a loan dependent economy, if interest rates decrease, then it is a positive for real estate market, as more people tend to take loan at lower interest rates.
However, for a country which does not have loan dependency, the interest rate changes does not usually have much impact on real estate share prices.
Third on the list of Interest Rate Sensitive Stocks & Sectors is the Automobile Industry Stocks - this again depends upon teh country's econmomy. If majority of the vehicles are purchased on loans, then this sector gets badly hit by increasing interest rates.
Fourth on the list of Interest Rate Sensitive Stocks & Sectors is the Capital Goods Stocks & Sector, which again depends upon the market demand and supply. In case of high interest rates, the overall demand in the market goes down and hence all the companies in the capital good sector take a hit as their products, services and other offerings see less demand. There is a speculation about less growth and hence these stocks too take a hit.
Other than the above mentioned four sectors, there is company specific interest rate risk which should be checked by all investors. For eg., there can be a company listed on NYSE which may have a market cap of say 10 million, but it may have an outstanding debt or loan of 15 million. Hence, the loan amount to be repaid is higher than the actual market cap valuation of the company. This company can belong to any sector, but its share price will be hit severly if the interest rates increase. Because of increase in interest rates, it will mean that this company will have to pay more interest on the outstanding loan amount and hence this poses a negative situation.
Therefore, to summarize:
1) Usually, Banks, Financial Sector companies, Real Estate, Auto and Capital Goods sector are the ones which get affected by interest rate changes.
2) Apart from the above, the investors should also look at the company outstanding loan and debt amounts
3) It should also be compared to the market valuation of the company based upon current stock price, before making any investment