Investors have been waiting long for the Federal Reserve to hike the interest rate. In September, the Fed refrained from raising the rate due to a sluggish Chinese economy and low U.S. inflation rate.
Nevertheless, October data from the U.S. Bureau of Economic Analysis painted a rosy picture of the economy. The report stressed that in October, the economy grew at a higher-than-expected rate. The nonfarm payrolls increased 271,000, a steep rise from August and September figures; the unemployment rate dropped to 5%; and most importantly, average hourly earnings jumped 9 cents, marking a monthly gain of 0.6% and annualized gain of 2.5%.
Nevertheless, a still-low inflation rate is one of the factors that might bar Fed from raising the rate. On Aug 27, 2015, the government reported core inflation growth rate of 1.2%, which is below the target inflation growth rate of 2%.
However, the positive macro-economic data, particularly the gains in average hourly earnings, which is directly related to the inflation rate, has brightened the possibility a rate hike at the next Fed meeting in Dec 2015.
‘Value’ a Saving Grace to Nullify Rate Hike
The anticipated rise in interest rate is likely to add volatility to the market. Although it has been seen historically that once the rate hike actually hits, the repercussions are not as dramatic. Nevertheless, an increase in interest rate produces wide and varied impact on the economy.
As the rate rises, cost of borrowing increases and the amount of money in circulation reduces, which in turn, keeps the inflation rate at a low level. Higher borrowing costs adversely affect businesses dependent upon huge debts, and thereby lower earnings. This renders the equity market a little less attractive for investors. Nonetheless, it should be noted that rate of interest is not the only factor that determines the price of a stock.
Given the possibility of a rate hike, it is wise to bet on the safety of value stocks, i.e. to identify the stocks that are truly trading at a discount. As for sector specification, it is relatively safer to put your money in the finance sector. This is because, owing to the very nature of their business, finance industries such as banking, insurance, asset managers and brokerage firms are likely to gain from an interest rate hike.
5 Value Stocks from the Finance Sector
We have chosen 5 finance stocks that are currently well placed to gain from a rate hike. For selecting these stocks, we have used our style score system.
