With the Federal Reserve widely expected to raise the U.S. benchmark interest rates today, discussion around how high (and how fast) interest rates will increase has once again become top of mind for all interested parties in financial markets around the world. After all, equities generally underperform in rising interest rate environments, with many investors seeking higher yielding fixed income securities holding more attractive risk profiles in such periods of time.
With the general consensus among many economists and financial experts being one in which interest rates are expected to continue to climb in a slow and steady fashion over the next few years at least, picking equities which can survive and thrive in such an environment should be a top priority for any investor looking to rebalance a portfolio in this new macroeconomic environment.
Generally, financials tend to outperform high-yielding equities such as utilities or telecommunications stocks as interest rates rise, due to the fact that banks make their money based on the spread between short-term and long-term interest rates, and high-yielding equities typically are viewed as less desirable as interest rates rise given the relative attractiveness of fixed income opportunities at a similar yield. For those expecting the forecast of the Federal Reserve to hold true for the years to come, concentrating more of a given portfolio on financials and less on other "bond proxy" sectors could be the way to go over the medium term.
Invest wisely, my friends.
