Although the Bank of England expressed surprise recently that the market was not expecting an interest rate increase in 2014, the speed at which it will raise rates looks set to be anything but rapid. For instance, MPC member Ian McCafferty was quoted last week as saying that rates should not go up too quickly, and one way to achieve this would be to begin raising them sooner rather than later.
This view has been echoed by other MPC members, with their consensus now seemingly settled on a rate rise in late 2014/early 2015. By doing so, a slower pace of increase may be achievable and these three stocks could stand to benefit from a gentle, rather than rapid, rise in interest rates.
Vodafone
Although Vodafone‘s (LSE: VOD) (NASDAQ: VOD.US) focus is increasingly outside of the UK — especially since its M&A activity in Germany and Spain in recent months — a slowly rising interest rate could provide support to the company’s share price. This is because Vodafone currently offers investors only marginal growth over the short to medium term, owing largely to its strategy of buying undervalued assets in Europe that are likely to take time to come good. As a result, its current yield of 6% is likely to remain attractive when compared to a still relatively low interest rate, meaning sentiment could remain buoyant for the stock over the medium term.
Lloyds
Although a higher interest rate will mean that Lloyds (LSE: LLOY) (NYSE: LYG.US) receives a higher income from its variable rate loan products, a slowly rising interest rate could have two positive effects on the bank. Firstly, it may encourage more businesses and individuals to take out loans, since a lower rate is clearly more attractive. Secondly, it could mean that the UK economy continues to receive a boost from loose monetary policy, which is likely to help push asset prices upwards, thereby strengthening Lloyds’ balance sheet. As a result, shares in Lloyds could benefit from increased investor demand.
Next
Retailers such as Next (LSE: NXT) have been direct beneficiaries of a low interest rate environment, with individuals being incentivised to spend rather than save. Slowly rising interest rates could help to continue this trend and provide a top and bottom-line boost for Next. They could also aid the UK’s economic recovery and push unemployment levels further down, which may aid a mid-level retailer such as Next through increased demand for its products. Furthermore, the special dividends announced earlier this year should make shares in Next relatively more attractive for income-seeking investors during a period of slowly rising interest rates, thereby helping to strengthen market sentiment for the stock.