5 Sectors Most Negatively Affected By Rising Interest Rates
For those who are not into economic indicators, anytime there is an interest rate announcement from Fed to any other authoritative agency, it is just another day at the office. But for those who watch the market like a hawk, interest rate can have big implications. And if you are an investor or trader who have money in the stock markets, interest rate announcements can be a trigger to either buy or sell.
Here are 5 sectors that are most negatively affected by interest rate hikes.
Developers and builders
Housing projects and mega constructions require huge capital outlay. Where do developers find those hundreds of millions to kick start their projects? From the bank of course. A rise in rate will make their repayments more costly, eating into their profits. From the mega-sized credit they take up, you can expect them to pay mega money.
On the other end of the spectrum, the condominiums and houses they construct are sold to end consumers who take up mortgages. A high mortgage rate will just add to the negative factors going against their buying decisions.
Even though we instinctively feel that banks are the main beneficiaries from interest rate hikes, this is not always the case. Although existing borrowers will pay more from rate increases, it could be a challenge to entice new customers to borrow.
The higher interest rates are, the lesser market for funds. Why put money in investment funds when returns are not predictable when banks are offering fixed deposit rate never seen before? Organizations that sell and manage equities can expect a smaller market for customers. Existing clientele may even start moving the money from these firms to savings accounts.
When interest rates rise, end consumers have their dollars stretched. Now they have bigger bills on their credit card statements and mortgage installments. This leads to a more thrifty spending behavior. Credit cards are left at home or voluntarily cut up.
Consumers start confining their spending to essentials and cut off luxury goods. At least for the time being. If someone works for an organization badly affected by high rates as well, he might anticipate a lower annual bonus. All in all, rate hikes are bad for high end retailers.
Because of the tendency of high interest rates to cause currency appreciation in the home country, other countries start to find goods more expensive to import. In the home country, importers will find it cheaper to import products. But exporters will find their overseas customers more reserved at buying from them.