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These 4 key sectors can be particularly profitable in a rising interest rate environment

With inflation at record highs, the Federal Reserve significantly raised interest rates from 0.25% to 1.75% during the year.

Higher interest rates cause less money to be in circulation, which increases its value, leading to lower levels of inflation. It’s easy to be worried as many benchmarks like the S&P 500 and industries like the once-hot cryptocurrency market have posted losses in the double digits and beyond.

Fortunately, a few sectors thrive during rate hikes, including financials, real estate, energy, and healthcare.

Financial services

Financial services, which can include banks, insurance companies and brokerage firms, are one of the main industries that benefit from a sharp rise in interest rates.

For example, profit margins can increase during this time, especially with banks. With higher rates, banks can charge higher rates on consumer loans. Interest rates on other types of financing like credit cards, car loans and payday loans are also rising.

Banks are paying higher rates on savings accounts, but at pitifully low yields, with the average savings account paying 0.1%.

This level marks only a difference of 0.04% compared to last year’s figure of 0.06%.

Brokerage firms like Charles Schwab may also see higher profits during this time as margin lending rates typically increase. Investors can use margin loans to buy more securities than they could buy with their available cash, magnifying their gains and losses.

Insurance companies can also perform well since they can earn higher returns on their bond investments. These companies generally invest in safe and reliable bonds to earn a stable income that supports the insurance policies they underwrite.

Take UnitedHealth Group Inc. A Hwhich has risen 6% since the start of the year and lost 1.25%.

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Immovable

With the rise of new technologies and investments, it has never been easier to invest in real estate.

Some of these ways to get involved include real estate investment trusts (REITs), real estate crowdfunding platforms like Fund raising and REIT ETFs like Vanguard ETF Real Estate Index Fund VNQ.

These real estate assets can be easily purchased online through a broker or on crowdfunding sites for little or no cost. You also don’t need to invest thousands or tens of thousands of dollars to gain real estate exposure with these options.

Browse real estate investments with Benzinga Offer Filter according to your investment criteria.

Investing in real estate during a period of rising rates is a mixed bag. Some real estate investments crash while others thrive. Historically, real estate values ​​and rents increase over the long term and more so during high inflation.

But higher rates can lead to higher borrowing costs for real estate funds.

The two factors that can make or break real estate investments during this time are debt profiles and industry.

If a REIT has a high level of debt, profits could decrease since financing costs are much higher. Healthcare REITs are more stable as healthcare facilities are generally in demand, unlike other real estate sub-niches such as office buildings and shopping malls which are more susceptible to cyclical downturns.

An example of this sector is the healthcare REIT Omega Healthcare Investors Inc. IHOwhich has increased by 1% since the beginning of the year.

Moreover, it is currently offering a yield of 8.69%.

Related: You Can Co-Own This Cash Flow Multi-Family Real Estate Portfolio With Just $500

Energy

The energy sector includes oil processors and refiners. This sector tends to perform above average during inflation and rising rates, thanks to rising oil prices.

The price per barrel as measured by the Brent Crude Oil Index has risen to over $100 per barrel over the past two years. This factor, among others, has driven gasoline prices to record highs. Companies like Chevron Corp. CLC profited and returned 23% since the first of the year. It also offers a yield of around 4%.

The energy sector also includes renewable energy companies such as those that generate electricity from solar, wind, hydroelectric and geothermal sources. Renewable energy companies also create and maintain tools such as wind farms and solar panels.

Renewable energy is a promising sub-niche in the energy space as it resists recession and demand increases. One of the leaders in the renewable energy industry is Brookfield Renewable Partners BEPwhich owns and operates hydro, wind, solar and storage facilities around the world.

It is currently up 0.8% since the start of the year and it also offers a yield of 3.5%.

Health care

Like the other industries on this list, health care is recession-proof and will likely always be in demand. Most consumers would cut back on other discretionary spending ahead of healthcare costs, giving this sector an edge if inflation rises.

For example, most people know that health insurance is extremely important, especially since healthcare costs are the number one cause of bankruptcy in the United States This industry may also see higher demand during difficult times, including pandemics.

Healthcare in the United States is another unique sector as it is growing faster than the rest of the economy. National health spending is projected to grow 5.4% annually through 2028 to a total figure of $6.2 trillion, or 19.7% of total US GDP. This growth has been caused by advances in technology, an aging population and better access to disease treatments.

Healthcare stocks belong to various categories such as health insurance companies, pharmaceutical companies, biotechnology companies, medical device manufacturers and healthcare providers like Brilliant Health Group Inc. BHG.

Vertex Pharmaceuticals Inc. VRTX is one of the leading biotechnology companies in the United States. It focuses on creating drugs that fight genetic diseases such as cystic fibrosis and type 1 diabetes. ‘year.

Conclusion

Inflation has reached record highs and has fluctuated around 9% since the start of the year. Once-hot sectors like cryptocurrency and many US stocks that posted record gains in 2021 have fallen.

With the recession looming or perhaps already here, it is natural to feel anxious about investing and the future of the economy. However, you can diversify your portfolio and ease these fears by investing in sectors such as financial services, real estate, traditional and renewable energy, oil and healthcare which tend to perform well during rate hikes. of interest.

Looking for ways to increase your yields? Check out Benzinga’s coverage of alternative investments:

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