The Bank of England is meeting on Thursday. Bond markets are pricing in a high expectation of a 0.15% rise in interest rates. Given the current level of 0.1%, this would more than double the base rate. Even though rates would still be close to zero, there’s also the potential for the committee to signal the potential for more hikes into 2022. Although this could be negative for the stock market in general, there are some FTSE 100 stocks that I think could benefit. Here are four that I am considering for my portfolio.
Areas to look out for
As a quick disclaimer, there’s no guarantee that the central bank will raise rates this week. It may be delayed to December, or even early next year. However, based on comments from the committee members, it’s clear that the bank will be raising interest rates soon. The chances of the next move being an interest rate cut to zero are highly unlikely.
On the basis of a hike soon, I need to think about the types of FTSE 100 stocks that would benefit. One sector that could benefit is banking. Major banks make money based on the difference between the rate on the money it lends out versus the interest it pays. If rates increase, this margin will increase (as most of the benefit is kept by the bank instead of being given to the customer).
Another area is retail trading and investment companies. Higher interest rates mean the expectation of a stronger economy. This should mean more disposable income for people, some of which could be invested. Further, changes to central bank policy are usually followed by periods of volatility in financial markets. This volatility could present trading opportunities, which brokerage firms benefit from via higher transaction fee revenue.
Finally, companies that have low interest-bearing debt are appealing. This is because interest rate hikes won’t impact these FTSE 100 stocks as much. Low debt means that even if the interest costs of servicing this debt increase, it’s manageable. In contrast, firms with high debt levels could see costs increase significantly.
Specific FTSE 100 stocks
From the banking space, I’d favour NatWest and Barclays. Both banks are up over 80% in a one-year period. However, both stocks have also done well over a three-month period, when interest rate speculation started to ramp up. I think this is a good sign that future hikes would correlate to higher share prices for these two stocks.
In terms of risks, banks are vulnerable if we see another downturn in the economy. This would increase bad debts, defaults, and lower spending activity.
Another FTSE 100 stock I’d consider buying is Hargreaves Lansdown. The retail investing platform is up 15% over a one-year period. Any market volatility should enable it to see higher trade volume being put through by clients.
Finally, I’d consider buying JD Sports Fashion, with shares up 48% over one year. In its half-year results, interest-bearing debt stood at £263.9m. Yet with cash of £1.25bn, this meant that net cash stood at £995m. This relative lack of debt should aid the business going forward.
On the flip-side, JD Sports does have a headache with the Competition and Markets Authority regarding the purchase of Footaslyum. This is something I need to keep an eye on.
Jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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