These Are the Best Stocks for When Interest Rates Rise

Feb 17, 2022

These Are the Best Stocks for When Interest Rates Rise

The Federal Reserve is on the verge of hiking interest rates many times in the near future. This suggests that the moment has come for technology, traditionally conservative, and quality stocks to flourish. Inflation is at its highest level since the early 1980s and is only a hair below what was almost certainly the top, prompting the Fed to raise short-term interest rates at least four times this year. This might assist cut long-term bond yields, as higher short-term rates are intended to restrain economic demand, hence decreasing long-term inflation. Long-term rates have risen as inflation expectations have increased. This has a significant impact on technology stocks. If long-dated bond rates gradually rise — or even fall — this is beneficial for technology values, as lower yields increase the discounted present value of future earnings. Numerous technology businesses are valued on the basis of the earnings they are predicted to generate years from now, rather than on the basis of the profits they are already making. Indeed, Evercore data show that, on average, 12 months following the first rate hike in a fresh cycle of rises, S&P 500 technology stocks have outperformed the wider index by 13 percentage points, stretching all the way back to 1994. Today, the same might be said about technology equities. The Nasdaq, which is heavily weighted toward technology, is already down 13% from its Nov. 19 all-time high, as the 10-year Treasury yield has surged. Perhaps now is the moment to purchase the drop; however, there may be further pain in the near future.

Classically conservative stocks — those that provide goods and services that remain in high demand even when consumers and businesses have less money to spend — are also often strong choices when the Fed begins raising interest rates. Since 1994, utility, real estate, and healthcare companies in the S&P 500 have outperformed the wider index by an average of 4, 7, and 2 percentage points in the 12 months after a first-rate hike.

Another area to consider is quality stocks, regardless of sector. These businesses have consistent cash flows, either as a result of their defensive industries or as a result of their longevity and competitiveness. They often have substantial balance sheets with little debt.

When interest rates rise, companies with low debt burdens frequently do not face a big increase in the interest rate on their current bonds, allowing their values to stay relatively high. The S&P 500's quality stocks have generally outperformed the wider index by three percentage points in the year after a first-rate hike.

"As financial conditions tighten, they act as a tailwind for earnings quality," stated Dennis DeBusschere, founder of 22VResearch. Simply buy these companies before investors bid them up in price.

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Banks and Finance
South Korean CBDC – 7 South Korean Banks to Join Issuing The Digital Currency Since cryptocurrencies arrived on the financial scene and changed how people transact and transfer money, central banks have become more interested in developing their own virtual payment systems. After Russia, China, Nigeria, India, and Jamaica, South Korea is taking a major step toward introducing its own Central Bank Digital Currency in an upcoming pilot program involving the public and some major banks. The initiative aims to test the feasibility of a digital currency within the existing financial system, enabling a limited number of citizens to transact with CBDC at selected merchants and Points of Sale. This move aligns with the global trend of central banks exploring digital currencies to enhance payment efficiency, reduce transaction costs, and modernize the financial landscape. South Korea CBDC Pilot Program Bank of Korea (BOK), in collaboration with financial regulators, announced an initiative to test the rolling out of CBDC involving seven major banks and 100,000 participants. The pilot program “Project Hangang” is scheduled to run from April to June 2025, focusing on testing deposit tokens issued by banks and backed by the CBDC. These banks include KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, NH NongHyup Bank, Industrial Bank of Korea (IBK), and Busan Bank. These tokens will be used for transactions in both online and offline retail environments, allowing the government and financial institutions to evaluate their effectiveness. Users and Merchants Participation The BOK is expected to announce the project by the end of March, asking 100,000 South Koreans to participate in the pilot and convert their traditional bank deposits into digital tokens for payments. Individuals will be limited to a maximum holding of 1 million WON (approximately $687) and a total transaction cap of 5 million WON during the trial’s duration. Various merchants, including convenience stores, supermarkets, coffee shops, and online platforms, will accept these tokens as payment. Notable participants include 7-Eleven, Hanaro Mart, Ediya Coffee, Silla University, and Hyundai Home Shopping. This will help assess the practicality and usability of the CBDC across different retail settings. Global Adoption of CBDC The South Korean CBDC initiative is part of a broader global trend, with many countries exploring digital currencies to modernize their financial systems. The Bank for International Settlements (BIS) has been actively promoting CBDC projects worldwide, with major economies such as China, the European Union, and the United States conducting their own trials. China’s digital Yuan e-CNY is already in an advanced phase, with widespread adoption in various sectors. The European Central Bank is also working on a digital Euro, while the US Federal Reserve is researching the potential implications of a digital Dollar. These initiatives aim to improve payment efficiency, enhance financial inclusion, and strengthen monetary policy frameworks. Conclusion South Korea’s CBDC pilot marks a significant step toward digital financial transformation. By involving the public, key banking institutions, and merchants, the trial will offer critical data on the viability of digital currencies. As more countries explore CBDCs, these findings could influence future implementations worldwide, paving the way for a more efficient payment system.

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South Korean CBDC – 7 South Korean Banks to Join Issuing The Digital Currency

South Korean CBDC will be tested in a Central Bank-led pilot project involving 100,000 users and 7 issuing banks. Here’s what we know about this project.

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