The Bank of England raised interest rates again last week. The 0.5% jump means that the base rate is set at 1.75%. Analysts are forecasting that we aren’t done yet, with a year-end rate as high as 2.5% not out of the question. Even though I’m worried about the rate path, I know that there are some top shares to buy that are resilient and some that even benefit from higher rates.
Stocks that gain on higher rates
It doesn’t surprise me to see the major banks in the black over the past few months. For example, in the past three months the shares of Barclays, HSBC and NatWest are all up at least 6%. Clearly, I need to take into account longer-term performance metrics as well. But there’s a definite correlation between the rate hikes in the past few months and the banking sector gains. This is why I want to buy shares in this sector.
It’s not just the benefit from the UK rate movements, but also from around the world. Last month, the US Federal Reserve raised rates by 0.75%, with the European Central Bank also bumping the base rate up by 0.5%. This supports the truly global banks that have a presence in all these markets, such as HSBC.
The reason why banks do well here is due to the increase in the net interest margin. For example, mortgage rates have been rising significantly. However, the interest paid on my current account hasn’t changed at all. So the margin that the bank is making has increased so far in 2022, as it is pushing the rate charged for loans higher but not increasing the rate paid on assets. The spread between the two is the net interest margin.
Resilient shares to buy
I think that having exposure to banking stocks is a smart play for my portfolio. However, I don’t want to be overly concentrated in just one sector. Therefore, I also want to include stocks that might not rally on interest rate moves, but can at least stay supported.
For example, I want to buy shares with little debt on the books. In the latest annual report, IG Group noted long-term borrowings of £299.2m. Yet liquid assets stood at just over £2bn. So even with rate increases, I’m not concerned about the size of the loans on the balance sheet. I think the company will be able to operate without any issues even if interest rates shoots higher still.
Another line of thinking I have is to target a business that shouldn’t be overly impacted by consumer spending drying up. National Grid is a utility company that provides electricity and gas to customers. Higher rates may not be a positive for the business, but they aren’t a large negative either. I’m going to pay my utility bills even if I have to cut back spending in other areas. So I’d imagine that revenue for the business should hold firm in the coming year or so.
Future rate moves are difficult to predict, so just because I think I’ll buy the above stocks doesn’t mean that it’ll work out perfectly. But it does help me feel better about protecting my portfolio.