Barclay’s bull or Pearce take? How to profit from the winds of change in global interest rates
Each Friday, we highlight the key trading themes of the week, along with companies and sectors investors should be keeping their eye on.
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And speaking with Stockhead this week, Joseph highlighted some positioning opportunities that may develop as the macro outlook changes.
The Fed’s June policy meeting included an important shift; instead of the ‘2024 at the earliest’ mantra it stuck to throughout the pandemic, committee members indicated the next rate rise will probably happen earlier – in 2023.
That may not seem like a big change, but in the context of global liquidity settings, it can have an impact.
For example, US Fed committee member Jim Bullard followed the bank’s meeting by indicating rates may need to rise faster (in 2022), prompting a sharp selloff before markets stabilised last week.
With inflation almost sure to remain topical through the middle of the year, Raad said the shifting rates outlook was on the radar of analysts before the Fed’s shift.
" We’ve been speaking with other brokers, and there was quite a general consensus forming that it wasn’t going to be '2024 at the earliest'. So (the Fed’s shift) wasn’t a huge surprise for us, and I think plenty of people in the market saw it coming".
- Joseph Raad, Equities Trader
And despite the brief spike in volatility, Raad said it’s also:
“reassuring to know they are aligning themselves with a more realistic outlook”.
Interest rate beneficiaries
In that context, Raad highlighted banks & financials as a sector that could be poised to benefit as the global economic recovery continues.
While Australia’s major banks have performed well, small-cap financial stocks have tracked under the radar compared to other sectors.
In the consumer finance space, Raad’s pick of the bunch is Wisr (ASX:WZR), which recently completed a $50m funding round.
“What I like about Wisr is it’s just a simple business model.
Their q/q revenue and growth have been consecutively growing for 19 quarters now and with that steady model, you may not get rapid capital appreciation, but I think the risk there is minimised.”
He added the platform is now also backed by a AAA credit rating from Moody’s, and said the $50m funding round was a sign that institutional investors are backing the model.
“We saw their share price move quite strongly off the back of the loan origination news before that cap raising.
So essentially now they just have a bigger cash base to put towards growth. Adding it up I think it’s a company that while the stock might not move drastically, it’s an investment that makes sense in this space.”
The stock got hit hard in the crisis, but insurance more broadly is viewed as a beneficiary of a rising rates environment, where companies can generate a higher yield return on their invested float.
“Big insurance players have a positive exposure to rising bond yields,”
noting that QBE hasn’t yet eclipsed its pre-COVID high of around $15.
"Obviously, it’s easier said than done to reach pre-Covid levels, but the potential for gains is there."
- Joseph Raad, Equities Trader
Being selective on gold
Another asset class that posted a notable move in the wake of the Fed’s rate announcement was gold, with prices coming off the boil over the last fortnight.
The revised rates outlook prompted a round of strength in the US dollar, which saw USD-denominated gold fall back below US1,800 an ounce after making a run at US$1,900/oz.
For Raad and the team at Barclay Pearce, those dips offer a buying opportunity in a broader uptrend for the precious metal as inflation picks up.
He noted that while gold continued to trade flat into the end of last week, a number of ASX-listed gold plays posted a string of gains.
“I think that’s a testament to the fact investors saw that big drop (in gold) as irrational and expect to see it retest the US$1,800 level relatively soon.”
Taking that into consideration,
“We saw a great opportunity to enter gold, and we’ll continue to accumulate on those dips.”
One of Raad’s leading ASX picks in the gold space is West African Resources (ASX:WAF), which is currently trading at around $1.
“We do tend to see WAF act as a proxy to gold prices.
And it’s a multiplier in both directions so if you catch it at the right time when you think gold’s going to go up, you can make really good gains.
So there’s good potential there and I also like the stock long term. It’s a bit of a safer bet at the small-cap end, they’re producing well and managing their cost base.”
As an example of how ASX plays can give good proxy exposure to movements in underlying gold prices, Raad noted that while gold traded flat into the end of last week, WAF posted three consecutive daily gains.
“To me that shows a lot of confidence (in the outlook for gold).”
“Bellevue Gold (ASX: BGL) are similar in that sense. So they’re a few of the gold plays we’re looking at.”
Ultimately, Raad’s said the changing macro environment will provide opportunities for investors that can remain agile.
While markets have undoubtedly benefitted from rock-bottom interest rates, broader disruptions will only come from inflation spikes that force central banks to hike rates much quicker than expected.
For now, the main priority is to assess which sectors can benefit from the orderly normalisation of monetary policy as the global economy emerges from the pandemic.
To read the full Stockhead's article, click here.
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