Preparing for rising rates

Many who examine equity markets or discuss economic trends rightly focus on how low interest rates have been in recent years.

But in the investment world, most things that go down eventually come up, and that means it’s only a matter of time before rates rise.

Market watchers advise avoiding fixed income in an environment where growth-based inflation is accompanied by rate increases. High-yielding common shares also get hurt when rates rise.

Other sectors to sidestep when rates rise are utilities, consumer staples and telecoms. Look instead to assets that have an inflation hedge built in. Good examples are common stocks in energy, IT, materials, and the consumer discretionary sector (all of which benefit from the rising incomes which tend to accompany inflation).

Canadian equities should be the best performers when there’s growth-based inflation, because growth spurs resource consumption; and since resource stocks carry so much weight on the TSX, our markets will outperform. EAFE stocks (Europe, Australasia, and the Far East) would rank second, followed by U.S. equities.

Inflation fears also may batter the U.S. and Canadian dollars and some investors may move to gold. But watch the timing, because gold thrives on fear of inflation but then traders get bearish when prices start rising in earnest.

Floating-rate preferreds would also be good choices in this environment, along with emerging market stocks, which tend to do well when North American currencies are weakened by inflation.

Bank stocks would be another strong choice because they benefit from higher rates.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.