How to Invest When Interest Rates Are Rising

Business & InvestmentsAugust 10, 2023

For novice and seasoned investors, “interest rates hiking” produces a familiar sense of foreboding. Somewhere in our minds, we have been conditioned to believe that rising interest rates spell doom for the stock market, crushing its ability to deliver favorable returns. However, this is far from the whole story. An increase in interest rates is only one factor affecting the market, and astute investors can use this shift to their advantage. Below we will explore strategies to help you navigate the investment landscape when interest rates are rising.

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Invest in Hard Assets

When interest rates rise, bond prices typically fall, leading investors to question their investment’s value. This is the perfect scenario to invest in hard assets – tangible items such as real estate, gold, or art. The performance of these assets tends to be independent of interest rates, unlike bonds that have to measure up with the present returns in the market. Investing in hard assets can provide a good hedge against the decline in bond prices and robust returns in the long term.

Look at Inverse Funds

When investors know interest rates will rise, they often shift their portfolios toward cash and bonds. As a result, the stock market may fall. Therefore, when interest rates rise, inverse funds become a particularly beneficial investment option. As the name suggests, an inverse fund moves in the opposite direction of the equity markets and can deliver substantial returns if the stock price falls. This investment instrument can provide a good hedge as interest rates increase and conventional stocks decline.

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Consider Floating Rate Bonds

Though conventional bonds typically do not perform well in the rising interest rate environment, floating-rate bonds are a safe bet. These bonds are pegged to a specific benchmark interest rate and are adjusted periodically. This means their yields adjust higher if interest rates increase, providing suitable returns per market conditions. Floating-rate bonds have less interest rate risk and, in most cases, provide returns on par with bank deposit rates with slightly more risk.

Invest in Energy and Utilities

Utilities, energy, and other essential service companies are seemingly unconnected to the interest rate cycle. However, these companies tend to outperform comparatively during a rising interest rate era. One primary reason is that they deal with basic human necessities that people still need to use, regardless of the economic phase. These industries typically provide reliable cash flows, stable dividends, and predictable earnings growth, which makes them highly desirable investments.

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Invest Internationally

Globalization has made it easier to diversify your investment portfolio internationally. When interest rates rise in your home country, it does not mean that other countries are passing through the same phase. International markets can provide more extensive opportunities and tend to operate independently of your local market’s performance, which means disappointing situations in your home market may not affect the international market. It is always necessary to be cautious when entering a foreign market since it comes with an added level of risk.