Financial stocks are on fire in 2021. After a brutal 2020, rising interest rates are bringing cheer to bank stocks because higher rates lead to net interest margin expansion and healthier profits.
Although interest rates are still historically low, an increasing number of investors and analysts now believe inflation will push interest rates even higher in 2021 after more than $6 trillion in U.S. stimulus spending.
The financial sector is the most sensitive to changes in interest rates. When interest rates climb, so do profit margins for businesses like banks, insurance companies, brokerage firms, and money managers.
But several other sectors benefit from increasing interest rates since they usually signify a strengthening economy. And no one benefits from a rising economy like consumer discretionary stocks, which benefit immensely from improving employment, a healthier housing market, and purchases of consumer staples like foods and beverages, household goods, hygiene products, and alcohol and tobacco.
Industrials and retailers also do well from the general improvement of the economy.
Ultimately, you have to adjust your fixed-income portfolio to account for rising rates. Of course, that does not mean you have to chuck out all of your investments to favor companies that benefit from the economic health dividend indicated by rising rates. But it would help if you kept the stocks in this list in mind moving forward.
- Morgan Stanley (NYSE:MS)
- Royal Bank of Canada (NYSE:RY)
- BlackRock (NYSE:BLK)
- Blackstone (NYSE:BX)
- Nike (NYSE:NKE)
- Caterpillar (NYSE:CAT)
- Walmart (NYSE:WMT)
Stocks to Buy as Interest Rates Rise: Morgan Stanley (MS)
Morgan Stanley is one of the largest investment banks in the world. For the fiscal year 2020, the firm had total assets under management (AUM) of $1.1 trillion, deposits of $311 billion, net loans of $151 billion, and total equity of S103 billion. As of March 31, Morgan Stanley Wealth Management had $1.24 trillion in AUM.
Due to its leadership position in global capital markets, Morgan Stanley is one of the safest bets in the industry. So you cannot go wrong when investing in this one. That’s why it may not attract as much attention as some of the other major stocks out there.
But even if a stock is boring, it doesn’t mean you should not invest in it. Morgan Stanley’s large exposure to investment banking means it consistently outperforms bank stock peers, a bonanza for investors during the current trading boom. Record initial public offering activity and direct listings also helped power Morgan Stanley’s during this time.
Royal Bank of Canada (RY)
Royal Bank of Canada has largely been insulated from the impact of low-interest rates compared with many of its peers because of its conservative mortgage lending and impressive reserve build.
Still, many investors will be skeptical of pouring capital into the largest Canadian bank by market capitalization. The main reason? The Canadian financial market does not hold a candle to the U.S. in terms of volume.
But Canadian banking system is regarded by industry experts as one of the strongest and most stable banking systems globally. Royal Bank of Canada and the Toronto Dominion Bank (NYSE:TD) are among the world’s 25 largest banks and dominate the country’s banking sector. So, if you think that you are investing in a low-growth company, then you need not fear.
In the second fiscal quarter, the Royal Bank of Canada reported a net income of CAD 4.0 billion, up from CAD 2.5 billion from the prior year. Diluted EPS was CAD 2.76, up significantly over the same period. Overall, EPS is up 26% on a trailing 12 months (TTM) basis. Add to that a dividend yield of 3.5%, and you have all the makings of an outstanding bank stock.
Stocks to Buy as Interest Rates Rise: BlackRock (BLK)
New York-based BlackRock is the largest asset manager in the U.S., with $9.007 trillion in AUM at the end of March 2021. Much like Morgan Stanley, BlackRock is a prized stock within the financial services industry. It’s a dominant company considered too big to fail because of its economic size and financial muscle.
In the last five years, shares of the asset manager outperformed the S&P 500 by 55.6% and its sector by 66.8%. Of course, that isn’t exactly Tesla (NASDAQ:TSLA) growth. But what do you expect from a mature market performer in the financial services space?
In fact, now is the best time to increase your stake in BlackRock. Why? In January of this year, PNC Financial Services (NYSE:PNC) announced it was selling its 22% stake in BlackRock. The move led to a selloff in BlackRock stock. Although the stock recovered since then and has a one-year return of 59.8%, the stake sale certainly took the shine off BLK stock slightly, making it even more attractive for the average investor.
Blackstone is one of the world’s largest alternative asset management firms with assets under management of $648.8 billion as of March 31, up 4.9% from $618.6 billion three months earlier and 21% from a year earlier.
On a recent investor call, Stephen A. Schwarzman, chairman, CEO, and co-founder, said, “I anticipate significant continued expansion of our earnings power … for the foreseeable future as a result of new products and the acceleration of existing ones.”
Blackstone increased AUM by nearly half in the past two and a half years.
The asset manager recently launched a dozen new investment strategies, including life science and growth equity businesses. As a result, it has secular growth opportunities, which the company demonstrated by reporting $95 billion in asset inflows in an extremely difficult macroeconomic environment in 2020.
“This should be good time for the real world,” Blackstone President Jonathan Gray said in an interview. “Businesses like telemedicine and e-commerce will continue to do well but the pendulum is swinging back with a bunch of us getting out there again. It feels to me like this economic dam is starting to break.”
Stocks to Buy as Interest Rates Rise: Nike (NKE)
Nike is an all-weather stock that generally does well even during recessions. So, it should come as no surprise it is a must-have stock when the economy picks up steam.
Recently, the retailer reported excellent fiscal fourth-quarter earnings and sales that beat analysts’ forecasts due to record revenue in its largest market, North America. Sales more than doubled to $5.38 billion, with the region’s sales up 29% on a two-year basis.
In China, the company’s second-biggest market, sales rose 17% at $1.93 billion. Although the sales momentum was a bit sluggish, China is typically one of the fastest-growing markets for Nike. Hence, it can be considered a minor blip.
Total revenue jumped to $12.34 billion from $6.31 billion a year earlier, topping estimates for $11.01 billion due to selling more goods at full price and relying less on markdowns. Looking ahead, the global sporting goods company offered a better-than-expected sales outlook for the upcoming year, driven by the enthusiasm surrounding its women’s category, apparel business and Jordan brand.
Considering its strong operating performance, rich history, and exciting outlook, you cannot go wrong investing in NKE stock.
Heavy equipment maker Caterpillar has surged in response to President Joe Biden’s bipartisan $579 billion infrastructure deal, including $579 billion in new investments for roads, broadband internet and electric utilities.
Metals and machinery makers like Caterpillar are rallying on the prospect of higher government spending will boost demand for makers of construction materials and infrastructure engineering and design companies. The last few months have been great for the company after the pandemic ravaged its four reportable segments.
The recent earnings report confirms the recovery. Caterpillar handily beat analysts’ expectations for its first-quarter sales and earnings. The world’s largest construction equipment manufacturer earned $2.87 in adjusted earnings per share from $11.9 billion in sales. Analysts were forecasting $1.95 in per-share earnings from $10.5 billion in sales.
Pent-up demand and stimulus money is contributing well to the bottom line. The almost 50% earnings beat and 13% sales beat is a testament to Caterpillar’s resurgence. And, the numbers will only get better as the economy fully recovers.
Stocks to Buy as Interest Rates Rise: Walmart
Walmart might seem like a strange company to have on this list. After all, the discount retailer did well during the pandemic as people used stimulus money to stock up on essentials. Now, with the economy whirring back to life, the stimulus money will dry up, but there is another way of looking at this.
Economists are projecting 650,000 nonfarm payroll jobs to be added in the U.S. in June. The country remains 7.6 million jobs short of the number it had in February 2020. But the figure is heartening and underscores the economy’s recovery. With employment numbers improving each month, discretionary income will increase. Under these circumstances, every operating segment of Walmart will do very well.
Walmart’s extensive supply, distribution and store network coupled with an effective e-commerce strategy positions the retailer for success. Bears argue Walmart has few growth opportunities remaining as its U.S. segment has limited prospects for new store openings, and its international revenue is falling. But with an increased focus on e-commerce, the firm is better positioned to reach new customers that may never walk into any of its stores.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.