Which Sectors Benefit from Rising Rates?

What sectors outperform and underperform when interest rates rise

The economic flavour of 2022 has been rising interest rates coupled with rising inflation and slowing economic growth. Consecutive rate hikes by the US federal reserve have seen the South African Reserve Bank march to the beat of the same drum. The prime lending rate has seen 6 consecutive rate hikes in 2022 and the expectation is for this trend to continue towards the end of the year. SARB has increased the prime lending rate from 7.25% to 9.75% since the start of the year.

Rising rates generally have a negative effect on equity prices, since rising rates increase the discount rate used in equity valuations and a higher discount rate leads to a lower equity price. Historically some sectors have performed better than others during and after a rate hike cycle. According to a study done by Charles Schwab taking a look at the performance of the S&P 500 in the 12 months post the previous five rate hike cycles the following sectors have outperformed the market after a rate hike cycle:

1. Communication Services, Health Care, and Utilities sectors tend to see an uptick as increased volatility drives investors to more stable sectors of the market.
2. Energy stocks including oil, gas and coal tend to outperform off the back of rising commodity prices which drive up inflation.
3. Financials like banks tend to profit from rising interest rates as the spread of loans increases when rates rise.

Some of the sectors of the market that have historically underperformed in a rising rate cycle include industrials, consumer staples, materials, consumer discretionary and real estate.