For the second time of this year, Federal Reserve has lifted the interest rates despite uncertainty popping up from President Donald Trump’s decisions on trade policies. In fact, what has been flagged is that rising rates are not expected to wreck economic growth in the US. This was further supported by indications of additional interest rate hikes being planned for 2018 and 2019.
It is to be understood that the increase in rates by the Fed, directly impacts the way consumers borrow and conduct businesses. Not only it causes an effect on the cost of borrowing, but also impacts many other areas like fixed and variable rates, credit card rates, money markets and deposits rate and also the debt rate. Now, the Fed at this time increased the rates by a quarter point and hinted towards couple of more increases in 2018 and beyond. Not to forget that the yield on bonds decreases, as the increase in Fed rates has an inverse relationship with bond yield.
With the current scenario, it is key to note that the movement in interest rates can impact many stocks as well. As we know that dividend stocks sometimes take a back seat when investors look for punting money in high interest rate environment, thus equity market gets flooded with investment on growth stocks instead along with fixed deposits outside equity. In general, the rise in interest rates is typically favorable for financial sector stocks, as the ability to earn income by lending money goes up at higher rates than usual.
However, Australian stocks were seen to be trending cautiously on the Fed increase of interest rates, as the ASX 200 index slipped by 30.9 points (0.5%) to 6023.5, as there were some losses suffered as the index evaluated the market. Nonetheless, a few players still emerged to be winners out of the interest rate rise.
A clear ASX stock pick gathering the limelight was the payment disruptor company, Afterpay Touch Group Limited (ASX: APT), which witnessed an upward change of 8.6% in last five days, as on 14 June 2018. The primary reason for benefits from the macro environment lies with the group’s efforts of expansion in the US by virtue of group’s buy now and pay later approach; and with interest rates yielding value over a period of time. It is quite recently only that the group has commenced its online services in US market and this is expected to promote topline growth in years to come. Moreover, the tech ecosystem has grown quickly and there is capital available for ideas. Investors are ready to pay prices for tech stocks which can lead their market while the interest rates are on the higher side. Thus, growth is looked through to be empowering over the dividend scenario and tech stocks get an upper edge. Also P/E for tech stocks that is the earnings based multiple is simplistic to look at, as tech companies often reinvest their profit for growth purposes. With many stars aligning well for APT, this ASX stock pick’s six-months’ performance change has been 74.62%. Afterpay has been building momentum over last few months and has around 7,000 individual shopfronts that have Afterpay in-store being live, including all super retail group brands with integration pipeline remaining strong. Over $1.45b of total underlying sales have been processed through the Afterpay platform in first three quarters of FY18 (compared to $290 million for first three quarters of FY17).
While APT is just one example, however, ASX listed stocks that have exposure to US banks might also get a boost in the prevailing interest rate environment. Further, many to the likes of other IT stocks like Computershare and material sector stocks, in general, might be benefitting from the US economic scenario.