We enjoy interest rates once more

The ‘joy’ can appear a little small if we hold the wrong stocks, though …

This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time. I might transact in any securities at any time.

If you prefer to read the pdf version click here. (links may not work in pdf)

With central banks fighting inflation we experience once more the phenomenon of nominal interest rates. Some investors compare interest rates to the force of gravity in our physical world: both keep objects down to earth, and rising ever higher requires a lot of energy. As we currently experience, if asset prices rose too high above ground, higher interest rates bring them back down. Some assets are more affected than others, or at least should be, if we think about value rather than price. As discount rates used for valuation purposes rise, fundamentals of a few businesses could indeed benefit from higher rates…

Potential winners. Some businesses should prosper with higher interest rates. I can think of the following: Banks in general might benefit, but more specifically banks that have high deposit balances and pay low interest rates for these without losing customer’s deposits should earn considerable risk less net interest margins on those balances. Cases are easier without investment banking activities and very conservative loan books. Too high a level of interest rates should correlate with higher loan defaults and lower collateral asset prices (ie used cars), though. Insurances should be able to earn higher income and total returns from their investing business going forward. Companies with large piles of net cash or holding significant cash for third parties.

  • Computershare earns bigger margin income from cash balances held temporarily for corporate actions.
  • Brokers/intermediaries.
  • Similar companies?
  • Companies in capacity driven industries might benefit in a few years if industry CapEx levels are falling now due to high rates.

Inverting the losers. Highly leveraged companies, and their stocks, might lose due to higher interest levels and a likely worsening economic enivonment. –> companies with net cash, or at least lt. Debt with fixed coupons

Companies that have to spend heavy on capex today to earn (low) margins over the next x years, and then replace the equipment once more at higher prices. The annualized depreciation underestimates the real economic cost. –> asset light companies, companies that receive money upfront and/or hold it temporarily for 3rd parties.

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Further reads

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