【Top 3 Industries Resilient to Rising Interest Rates】Industries that will see increased profits in a “Japan with interest rates” | Seriously considered by high-dividend …
“When interest rates rise, stock prices fall.”
…Is that how you roughly remember it?
Actually, this is half right and half wrong.
While there are industries that suffer from rising interest rates, there are also industries where profits increase as interest rates rise clearly in existence.
In this article, I, Ace, a 30-something office worker who holds over 40 high-dividend stocks, have compiled the “Top 3 Industries Resilient to Rising Interest Rates” in a ranking format.
-
Why profits increase when interest rates rise (the mechanism)
-
Characteristics of stocks that have “pitfalls” even within strong industries
-
Industries that are generally considered strong, but which I intentionally excluded from the Top 3
I will explain these points in depth.
[Conclusion] Top 3 Industries Resilient to Rising Interest Rates
Rank | Industry | Reason for strength (in a nutshell) | Points to note
1st Place Banking: Lending rates rise quickly, while deposit rates rise with a delay
→ Margin expansion. Note: Some banks have large unrealized losses on government bonds
2nd Place Insurance: Can invest collected premiums at higher interest rates
→ Investment income increase. Note: Unrealized losses on existing bonds, increase in cancellations
3rd Place Cash-rich companies (regardless of industry): No debt, so interest payments do not increase
→ Interest on cash and deposits increases. Note: The “attractiveness of dividend yield” relatively decreases
As a special feature, I have positioned securities and trading companies as “conditionally strong.” I will explain the reasons in the second half.
To begin with, why do “companies that benefit” and “companies that lose” from rising interest rates diverge?
The point is simple: “Are you on the side that lends money, or the side that borrows it?”
-
Companies that lend or invest money → Interest received increases with rising interest rates (benefit)
-
Companies that borrow money to conduct business → Interest paid increases with rising interest rates (lose)
Another important factor is whether interest can be “passed on immediately”.
Even within the same financial sector, companies where the interest received rises quickly while the interest paid rises slowly benefit the most from rising interest rates.
Looking at it from these two perspectives, the strong industries become clearly visible.
No. 1: Banks – Benefiting from the ‘Center’ of Rising Interest Rates
Reason for Strength: Widening Interest Margins
The pillar of bank profits is ‘Lending Interest Rate – Deposit Interest Rate’ = Interest Margin.
When interest rates rise,
-
Lending Interest Rate: Since many loans are linked to short-term interest rates, they rise immediately
-
Deposit Interest Rate: Ordinary deposit interest rates rise only slowly
This time lag causes the interest margin to widen.
In the era of zero interest rates, banks were in a state of ‘covering with volume while interest margins remained almost zero.’ Since interest rates are returning, the entire industry will see a boost in profits.
Pitfall: Beware of ‘Unrealized Losses on Government Bonds’
However, not every bank is a good choice.
When interest rates rise, the prices of bonds already held (such as government bonds) fall.
In particular, some regional banks that bought large amounts of long-term government bonds during the past era of low interest rates have a structure where unrealized losses tend to swell.
Points to look at
-
Unrealized gains/losses on securities (listed in financial statements)
-
Ratio of ‘variable interest rates’ in loans
-
Composition of deposits (the more individual ordinary deposits, the more advantageous)
Roughly speaking, the image is that mega-banks and trust banks benefit significantly, while banks that have hoarded bonds are easily offset.
No. 2: Insurance – ‘Investment Companies’ Revive When Interest Rates Return
Reason for Strength: Increased Investment Yields
Insurance companies generate profits by investing the premiums collected from us over a long period. The core of these investments is bonds such as government bonds.
The era of zero interest rates meant a prolonged state where ‘safe investments yielded no returns,’ and life insurance companies, in particular, suffered from ‘negative spreads’ (promised yields > actual investment yields).
When interest rates rise,
, so investment income will gradually improve.
Difference from banks: The effect is a ‘gradual type’
If banks are the type that ‘takes effect the moment interest rates rise,’ insurance is the type that ‘takes effect gradually over years.’
While it lacks the immediate impact of banks, it is characterized by a long-lasting effect. It is an industry that is compatible with long-term high-dividend investors.
Pitfalls
-
Like banks, unrealized losses on held bonds will temporarily expand
-
The possibility that cancellations will increase as more people switch to other financial products with higher interest rates
-
Non-life insurance performance is also swayed by the frequency of natural disasters (it is not determined by interest rates alone)
3rd Place: Cash-Rich Companies – Strength Chosen by ‘Financials’ Rather Than Industry
3rd place is not a specific industry. Regardless of the industry, it refers to ‘companies with plenty of cash and little debt.’
Reason for strength: Rising interest rates are almost ‘only a plus’
-
Since there is almost no debt, interest payments do not increase
-
The cash and deposits held will start to earn interest
-
While competitors struggle with rising interest rates, they can go on the offensive with price-cutting competition or capital investment
When interest rates rise, rivals with high debt go on the defensive. At that time, companies with surplus cash on hand can continue to increase dividends and buy back their own shares.
For high-dividend investors, this is a major source of peace of mind.
How to identify (for beginners)
-
Equity ratio: If it is 60% or more, the financial position is quite sound
-
Net cash: Companies where “cash and deposits – interest-bearing debt” is positive (effectively debt-free)
-
Operating cash flow: Is it consistently positive every year?
Daring to state a “counter-argument”
I will write this honestly.
When interest rates rise, you can earn decent yields even from deposits and government bonds. As a result, the appeal of “specifically targeting a 3-4% yield with stocks” relatively decreases.
In other words, even for cash-rich high-dividend stocks, there are times when the stock price is sold off in the early stages of rising interest rates.
Even so, the reason I included them in the Top 3 is that the business performance itself is not damaged at all. Even if the stock price drops temporarily, if the dividend is not reduced, it becomes a “chance to buy more” for a high-dividend investor.
Companies whose performance is damaged versus companies whose stock prices only fluctuate temporarily. I believe whether or not you can distinguish this difference is the turning point in a rising interest rate environment.
Extra edition: Industries said to be “strong” but which I have made conditional
Securities: Determined by “market heat” rather than interest rates
Securities companies are in finance, so they are often said to be “resilient to rising interest rates.”
Certainly, interest income from margin trading and profits from the group’s banking division will increase.
However, the core of a securities company’s earnings is stock trading commissions and underwriting business. If the stock market cools down due to rising interest rates, trading volume will decrease and commission income will fall.
Because the influence of “whether the stock market is booming” is greater than “rising interest rates themselves”, I have made it conditional.
Trading companies: What is strong is “inflation,” not “interest rates”
Trading companies are also a prime example of being “resilient to inflation.” I agree with this as well.
However, what is easy to confuse here is the point that “resilient to inflation” and “resilient to rising interest rates” are different things.
-
Trading companies tend to see increased profits from price increases (inflation) in resources and food
-
On the other hand, there are companies with interest-bearing debt on the scale of trillions of yen for business investment.
-
Rising interest rates in Japan tend to lead to a stronger yen, which can be a headwind for trading companies that earn their income overseas.
They are top-tier in an ‘inflation + weak yen’ environment, but the outlook changes in a ‘rising interest rates + strong yen’ environment. Therefore, I have categorized them as an extra.
Summary: View rising interest rate phases in two stages: ‘industry’ and ‘financials’
Just by knowing ‘which industries benefit and which industries suffer,’ the way you protect your portfolio changes completely.
Next Preview: ‘The 3 Worst Industries for Rising Interest Rates’ and my portfolio diagnosis
In the next free article, I will explain the 3 worst industries that suffer from rising interest rates.
And in the subsequent paid article, I will categorize the domestic high-dividend stocks I actually hold into
and diagnose with numbers ‘how much your own portfolio can withstand rising interest rates.’
Honestly, after diagnosing it, I realized, ‘So this was the true nature of my unrealized losses.’ If you are interested, please follow me and stay tuned.
Frequently Asked Questions
Q1. Should I just buy bank stocks during a period of rising interest rates?
A. I do not recommend it. While banks benefit significantly from rising interest rates, if the economy worsens and bankruptcies among borrowers increase, their performance can collapse all at once. I believe it is realistic to combine stocks that are affected differently, such as ‘banks that earn from interest rates’ and ‘cash-rich companies that protect themselves with their financials.’
Q2. Where can I check if a company is cash-rich?
A. It is most reliable to compare cash and deposits with borrowings and corporate bonds (interest-bearing debt) on the ‘Balance Sheet’ in each company’s financial results summary. The ‘equity ratio’ displayed in securities company apps is also a convenient guideline.
Q3. If interest rates fall in the future, will the opposite of what we discussed happen?
A. Basically, the movement will be the opposite. However, cash-rich companies will not see their performance damaged even if interest rates fall, so their strength lies in being unlikely to collapse significantly in either scenario. That is precisely why I place cash-rich companies at the foundation of my portfolio.
Note: This article does not recommend investing in any specific stock or industry. Please make investment decisions at your own responsibility.