With record inflation, the Federal Reserve has drastically raised interest rates from 0.25% to 1.75% over the course of the year.
Higher interest rates lead to less money in circulation, which increases its value, leading to lower levels of inflation. It’s easy to be anxious since many benchmarks like the S&P 500 and industries like the once red-hot cryptocurrency market have realized double-digit-plus losses.
Luckily, a few sectors thrive during rate hikes, including financial services, real estate, energy and healthcare.
Financial Services
Financial services, which can include banks, insurance firms and brokerage companies, is one of the key industries that benefits from a sharp rise in interest rates.
For example, profit margins can increase during this time, especially with banks. With higher rates, banks can charge higher rates on consumer loans. Interest rates on other types of financing like credit cards, car loans and payday loans also increase.
Banks pay higher rates on savings accounts, but at pitifully low yields with the average savings account paying 0.1%.
This level marks only a 0.04% difference from last year’s figure of 0.06%.
Brokerage firms like Charles Schwab may also see higher profits during this time, since rates on margin loans typically increase. Investors can use margin loans to buy more securities than they would be able to buy with their available cash, amplifying their gains and losses.
Insurance companies can also perform well since they can earn higher yields on their bond investments. These companies usually invest in safe, reliable bonds to earn steady income that backs the insurance policies that they write.
Take UnitedHealth Group Inc. UNH, which is up 6% since the beginning of the year and yields 1.25%.
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Real Estate
With the rise of new technology and investments, it’s never been easier to invest in real estate.
Some of these ways to jump in include real estate investment trusts (REITs), real estate crowdfunding platforms like Fundrise and REIT ETFs like Vanguard’s Real Estate Index Fund ETF VNQ.
These real estate assets can be easily purchased online via a broker or at crowdfunding sites for minimal or zero costs. You also don’t need to invest thousands or tens of thousands of dollars to gain real estate exposure with these options.
Browse real estate investments with Benzinga’s Offering Screener based on your investment criteria.
Investing in real estate during a period of rising rates is a mixed bag. Some real estate investments get crushed while others thrive. Historically, property values and rents increase during the long term and more so during high inflation.
But, higher rates can lead to increased borrowing costs for real estate funds.
The two factors that can make or break real estate investments during this time are debt profiles and industry.
If a REIT has a high debt load, then profits could decrease since financing costs are much higher. Healthcare REITs are more stable since healthcare facilities are usually in demand, unlike other real estate sub niches such as office buildings and retail centers that are more susceptible to cyclical downturns.
One example of this sector is healthcare REIT Omega Healthcare Investors Inc. OHI, which has increased by 1% year to date.
Additionally, it currently offers an 8.69% yield.
Related: You Can Become Part-Owner Of This Cash-Flowing Multifamily Real Estate Portfolio With Only $500
Energy
The energy sector includes oil processors and refiners. This sector tends to have above-average performance during inflation and increasing rates, thanks to higher oil prices.
The price per barrel as measured by Brent crude oil index has increased to over $100 per barrel over the last two years. This factor, among others, has caused gas prices to be at record highs. Companies like Chevron Corp. CVX have profited and have returned 23% since the first of the year. It also offers a yield of approximately 4%.
The energy sector also includes renewable energy companies like those that generate electricity via solar, wind, hydroelectric and geothermal sources. Renewable energy companies also create and maintain tools like windmill farms and solar panels.
Renewable energy is a promising sub niche within the energy space since it’s recession resistant, and demand is increasing. One of the leaders of the renewable energy industry is Brookfield Renewable Partners BEP, which owns and operates hydroelectric, wind, solar and storage facilities throughout the world.
It’s currently up 0.8% from the beginning of the year, and it also provides a 3.5% yield.
Healthcare
Like other industries on this list, healthcare is recession resistant and will probably always be in demand. Most consumers would reduce other discretionary expenses before healthcare costs, giving this sector an edge during rising inflation.
For example, most people know that health insurance is extremely important, especially since healthcare costs are the leading cause of bankruptcy in the U.S. This industry can also see higher demand during tough times, including pandemics.
U.S. healthcare is another unique sector since it’s growing faster than the rest of the economy. National health spending is predicted to grow by 5.4% annually through 2028 to a total figure of $6.2 trillion, or 19.7% of the total U.S. GDP. This growth has been caused by advances in technology, an aging population and greater access to disease treatments.
Healthcare stocks fall under various categories like health insurance companies, pharmaceutical firms, biotech, medical device manufacturers and healthcare providers like Bright Health Group Inc. BHG.
Vertex Pharmaceuticals Inc. VRTX is one of the top biotech companies in the U.S. It focuses on creating drugs that combat genetic diseases like cystic fibrosis and Type 1 diabetes. This innovative, cutting-edge company is trading at $289.60, which is 32% higher than the first of the year.
Bottom Line
Inflation has soared to record highs and fluctuated around 9% since the beginning of the year. Once hot sectors like cryptocurrency and many U.S. stocks that had record gains in 2021 have been tanking.
With recession pending or maybe already here, it’s natural to feel anxious about investing and the future of the economy. However, you can diversify your portfolio and mitigate these fears by investing in industries like financial services, real estate, traditional and renewable energy, oil and healthcare that tend to perform well during interest rate increases.
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