In this article, we discuss 10 best investments during high interest rates. If you want to skip our detailed discussion on the stock market outlook and industries benefiting the most due to high interest rates, head directly to 5 Best Investments During High Interest Rates.
According to J.P. Morgan’s analysis last year, as mentioned by Forbes, starting from February 2009, there was a strong correlation between the movements of the S&P 500 and the 10-year Treasury bond yield until the 10-year yield reached 3.5%, at which point they began to diverge. In simpler terms, increasing interest rates can benefit the overall stock market up to a certain threshold. Rising interest rates have several implications for financial markets. They tend to put pressure on stock valuations, impacting corporate profits and growth prospects, especially for growth stocks. Dividend-paying stocks may need to increase yields to compete with potentially higher bond coupon rates. However, financials, particularly banks and lending institutions, historically perform well in rising rate environments as they can earn more on loans.
“As the Federal Reserve increases interest rates, we can anticipate a deceleration in economic growth,” Eric Freedman, Chief Investment Officer, U.S. Bank Wealth and Institutional Asset Management, commented in July 2023. Indeed, the Gross Domestic Product (GDP) expanded at a notably slower rate in 2022, registering a 2.1% growth compared to the 5.9% seen in 2021. In the first quarter of 2023, the economy seemed to stabilize, achieving a 2.0% annualized growth rate. Hiked interest rates have also altered the landscape for equity investors, leading to potential impacts on future earnings growth for U.S. companies. Economic weakness, resulting in slower GDP growth, can affect corporate earnings and stock prices. Additionally, the attractiveness of bonds and other fixed income investments increases with higher interest rates, potentially reducing demand for stocks. Stocks with premium price-to-earnings (P/E) multiples, particularly those with future earnings expectations that may not materialize, face risks in this changing environment. Higher debt costs due to elevated interest rates could also impact corporate profits and stock prices. While the Federal Reserve has signaled more rate hikes to come, the outlook for equities remains uncertain, with factors like corporate performance and inflation influencing market dynamics and potential volatility ahead.
It’s not only financial companies that can thrive in a favorable rising interest rate environment. Consumer discretionary stocks can also experience a boost, as improved employment and a healthier housing market tend to encourage consumers to indulge in non-essential purchases beyond basic staples like food, beverages, and hygiene products. According to CNBC, in July 2022, the United States’ inflation rate, assessed through the Consumer Price Index, stood at 8.5%. Although the impact of inflation varied across different goods and services, categories like food and energy witnessed the most significant price increases. Some noteworthy companies to watch during interest rate hikes include Bank of America Corporation (NYSE:BAC), in the banking and finance sector, as well as consumer goods retailers such as Walmart Inc. (NYSE:WMT).
Investors should consider strategies for navigating this environment, such as strategic bond investments to manage rate exposure, actively managed strategies to mitigate concentration risk, and diversification across sectors, regions, and market capitalization to maintain a balanced portfolio. Investors looking to expand their portfolio through low-risk investment opportunities during a period with hiked interest rates can look at Visa Inc. (NYSE:V), JPMorgan Chase & Co. (NYSE:JPM), and Berkshire Hathaway Inc. (NYSE:BRK.A).
Our Methodology
We selected stocks from industries that historically perform well during high interest rate environments, such as consumer staples, banking, retail, and insurance. We aimed to select stocks that had the highest hedge fund sentiment in the aforementioned sectors. We assessed the hedge fund sentiment from Insider Monkey’s database of 910 elite hedge funds tracked as of the end of the second quarter of 2023. The list is arranged in ascending order of the number of hedge fund investors in each firm.
Photo by Mirza Babic on Unsplash
Best Investments During High Interest Rates
10. Philip Morris International Inc. (NYSE:PM)
Number of Hedge Fund Holders: 54
Philip Morris International Inc. (NYSE:PM) functions as a tobacco enterprise working to create a smoke-free future. On September 13, Philip Morris International Inc. (NYSE:PM) declared a $1.30 per share quarterly dividend, a 2.4% increase from its prior dividend of $1.27. The dividend is distributable on October 12, to shareholders of record on September 27. According to Insider Monkey’s second quarter database, 54 hedge funds were bullish on Philip Morris International Inc. (NYSE:PM), compared to 55 funds in the last quarter. Terry Smith’s Fundsmith LLP is one of the major stakeholders of the company, with 15.8 million shares worth $1.54 billion.
In addition to Visa Inc. (NYSE:V), JPMorgan Chase & Co. (NYSE:JPM), and Berkshire Hathaway Inc. (NYSE:BRK.A), Philip Morris International Inc. (NYSE:PM) is one of the best investments during high interest rates.
Ariel International Fund made the following comment about Philip Morris International Inc. (NYSE:PM) in its Q1 2023 investor letter:
“Finally, tobacco maker, Philip Morris International Inc. (NYSE:PM) declined in the period on concerns related to supply-chain disruptions resulting from the war in Ukraine, which we view as temporary. We believe the favorable economics and margin expansion associated with market share gains from the IQOS brand and Reduced Risk Products should yield value creation opportunities in the years ahead. Furthermore, at current trading levels, we think the company’s operating leverage, pricing power, and free cash flow profile offer a margin of safety.”
9. Colgate-Palmolive Company (NYSE:CL)
Number of Hedge Fund Holders: 58
Colgate-Palmolive Company (NYSE:CL) produces and markets consumer goods on a global scale. The corporation is divided into two divisions – Oral, Personal, Home Care, and Pet Nutrition. On July 28, Colgate-Palmolive Company (NYSE:CL) reported a Q2 non-GAAP EPS of $0.77, beating Wall Street estimates by $0.02. The revenue of $4.82 billion increased 7.6% year-over-year, surpassing market consensus by $120 million. Colgate-Palmolive Company (NYSE:CL), as part of the consumer goods industry, benefits from several factors that make it less susceptible to the impacts of high-interest rates, such as strong brand loyalty and product differentiation to shield it from price sensitivity, as well as its global presence.
According to Insider Monkey’s second quarter database, 58 hedge funds were bullish on Colgate-Palmolive Company (NYSE:CL), as compared to 55 in the previous quarter. Jean-Marie Eveillard’s First Eagle Investment Management is the leading stakeholder of the company, with an estimated 11 million shares worth $854.5 million.
Third Point Management made the following comment about Colgate-Palmolive Company (NYSE:CL) in its Q1 2023 investor letter:
“Existing positions in LVMH, Disney and Microsoft gained while FIS, Bath & Body Works, and Colgate-Palmolive Company (NYSE:CL) posted losses after their management teams lowered 2023 guidance despite reporting solid quarterly results. FIS and Colgate have both since “beat and raised” this guidance, indicating that many management teams are adopting very conservative tones in this uncertain macro environment.”
8. PepsiCo, Inc. (NASDAQ:PEP)
Number of Hedge Fund Holders: 68
PepsiCo, Inc. (NASDAQ:PEP) is a global company known for producing, marketing, and distributing a wide range of beverages and convenient foods. On July 20, PepsiCo, Inc. (NASDAQ:PEP) declared a quarterly dividend of $1.265 per share, in line with previous. The dividend will be distributed on September 29, to shareholders of record on September 1. PepsiCo, Inc. (NASDAQ:PEP) is less affected by high interest rates due to its diversification across multiple sectors and regions, a strong financial position with ample cash reserves, pricing power, efficient capital management, hedging strategies, and a portfolio of strong brands.
According to Insider Monkey’s second quarter database, 68 hedge funds were bullish on PepsiCo, Inc. (NASDAQ:PEP), two down from the last quarter. Ric Dillon’s Diamond Hill Capital is a prominent stakeholder of the company, with 2.70 million shares worth nearly $501 million.
Madison Sustainable Equity Fund made the following comment about PepsiCo, Inc. (NASDAQ:PEP) in its Q1 2023 investor letter:
“PepsiCo, Inc. (NASDAQ:PEP) announced that it will commit $3.3 million in funds toward water replenishment projects across North America. These projects aim to reduce absolute water use and replenish back into the local watershed more than 100% of the water used at company-owned and third-party sites in high water-risk areas.”
7. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders: 74
The Procter & Gamble Company (NYSE:PG) offers branded consumer packaged goods worldwide. Its operations are divided into five segments – Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. On July 28, The Procter & Gamble Company (NYSE:PG) reported fourth quarter results for fiscal 2023. The non-GAAP EPS of $1.37 exceeded Wall Street estimates by $0.05. The revenue of $20.6 billion increased 5.5% year-over-year, surpassing market consensus by $610 million.
According to Insider Monkey’s second quarter database, 74 hedge funds were bullish on The Procter & Gamble Company (NYSE:PG), one down from the last quarter. Ray Dalio’s Bridgewater Associates is a significant position holder in the company, with a stake worth $700.5 million.
6. Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Holders: 75
Wells Fargo & Company (NYSE:WFC), a diversified financial services corporation, offers a range of banking, investment, mortgage, and consumer and commercial financial products and services both in the United States and globally. The company is organized into four segments – Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management. On July 14, Wells Fargo & Company (NYSE:WFC) reported a Q2 GAAP EPS of $1.25, beating Wall Street estimates by $0.09. The revenue of $20.53 billion increased 20.6% year-on-year, surpassing market estimates by $410 million. Wells Fargo’s loan portfolio diversification, pricing flexibility, investment management, loyal customer base, and regulatory risk measures enable it to navigate changing interest rate environments well.
According to Insider Monkey’s second quarter database, 75 hedge funds were bullish on Wells Fargo & Company (NYSE:WFC), as compared to 78 in the last quarter. Harris Associates is the top stakeholder of the firm, with over 24 million shares valued at approximately $1.02 billion.
Like Visa Inc. (NYSE:V), JPMorgan Chase & Co. (NYSE:JPM), and Berkshire Hathaway Inc. (NYSE:BRK.A), Wells Fargo & Company (NYSE:WFC) is one of the best investments for high interest rate periods.
Rowan Street Capital made the following comment about The Procter & Gamble Company (NYSE:PG) in its Q4 2022 investor letter:
“Let’s look at The Procter & Gamble Company (NYSE:PG). Dividend yield is 2.4%. Earnings are forecasted to grow at 5.9%, and its current earnings multiple is at 25x. Now, lets say over the next 3-5 years the market loses interest in the “safe”, mature companies that grow at anemic rates and gets an appetite for growth again. It’s very unlikely that Mr. Market will be paying 25x for 5.9% earnings growth. Let’s assume that multiple declines to the market average of 18x — that would be ~6.9% drag per year on the total expected return over next 3-5 years. If we get 2.4% (dividend) + 5.9% (earnings growth) – 6.9% (decrease in earnings multiple) = 1.4% (annual return we can expect on average from this stock).”
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Disclosure: None. 10 Best Investments During High Interest Rates is originally published on Insider Monkey.