Four stocks likely to struggle when interest rates rise

Because of their capital needs, telecoms and utilities have an inverse relationship with interest rates.

Vikram Barhat 25 July, 2018 | 5:00PM

The Bank of Canada earlier this month raised its benchmark interest rate by another 25 basis points to 1.5%, following in the footsteps of the U.S. Federal reserve, its counterpart south of the border. It was the fourth time in the last 12 months that Canada's central bank increased its overnight interest rate. Both the Fed and Bank of Canada have hinted at more rate hikes to come.

The move signifies central banks' growing confidence in the strength of their respective economies and the trajectory of inflation. While rate hikes are generally a sign of a healthy economy, and a positive for stock markets, they tend to adversely affect some sectors and cause them to underperform.

For investors, this means stocks in sectors such as telecommunications and utilities warrant a fresh appraisal. The prices of these stocks have an inverse relationship with interest rates. Due to the capital-intensive nature of companies in these sectors, they need to frequently borrow capital to drive growth and upgrade infrastructure. So when interest rates climb, they push borrowing costs higher, leading to increased debt levels.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BCE Inc56.54 CAD0.34
Fortis Inc52.74 CAD1.33
Rogers Communications Inc Class B57.40 CAD-0.17
Southern Co56.06 USD1.91

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.

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