46% of mortgages in 2021 were fixed rate with an average term of two years. This compares with the usual fixed-rate mortgage volume of around 15 percent and means some of the impact of rising rates could be deferred until 2023.
Dan Moore, portfolio manager at Investors Mutual, says that while Australian companies have not reported earnings since rates started rising, he points to clothing retailer GAP’s recent poor earnings result in the US to highlight how the consumer is reacting to the increase in interest. rates
Increase in time deposit rates
Moore says not all retailers will be affected equally: those dealing with wealthier or retired customers who benefit from rising time deposit rates are less likely to be affected.
Moore says that rising interest rates haven’t always led to falling property prices, as it depends on where you are in the interest rate cycle. Typically, in the early stages of the rate cycle, both rates and property prices may increase as they did in 2004–7. But towards the latter stage of the cycle, higher rates start to kick in, affecting consumers’ ability to finance their loans.
He adds that the current cycle is different as property prices started to fall in the early stages of the rate cycle, probably because prices are extremely high and consumers are highly leveraged.
Moore expects Australian property prices to fall, citing falling auction clearance rates as an early warning sign. He also points to the experience of New Zealand, where interest rates have already risen 1.75 per cent, causing Auckland house prices to fall 14 per cent.
Moore is wary of companies leveraged in new home starts due to concerns about real estate developers and building materials companies.
Higher revenue margin
Dive advises investors to be wary of higher-leverage companies whose debt comes due in the short term.
There are not too many companies that do well in a rising interest rate environment, as rising rates are generally a drag on the economy. But Moore reckons Computershare is likely to make more of a profit from its share-registration business as interest rates rise.
Dive says insurance companies should also benefit from higher rates. QBE has an insurance fleet of $29 billion ($41 billion) of premiums that are paid up front. This float is invested in high-quality government bonds, corporate debt, and short-term money market. Each 1 percentage point increase in rates should result in additional gains for QBE of about $290 million.
He believes that food retailers will benefit from consumers choosing to eat at home more often.
Bank margins are likely to benefit from rising short-term rates, but could face higher bad debt charges as a result of higher mortgage stress.
Investors haven’t seen interest rate increases for more than a decade and will need to adjust their playbook.