Increasing interest rates & how to best position your portfolio.
If the Fed increased short-term borrowing rates, what borrowing rates will be hit hardest? You guessed it, short-term rates. Therefore, stay away from companies that are heavily burdened by short-term debt.
Companies that rely heavily on short-term debt will be the most adversely impacted by a rate increase. This will impact their profitability and impede their ability to maintain operations and pursue future growth opportunities.
Companies that have balances sheets with little short-term debt are a better pick. Look for companies that have financed much of their debt with long-term debt obligations or use their retained earnings to finance company growth. With the use of retained earnings they are free of being subject to increasing interest payments on their finances.
Larger companies probably fair better, since they typically are not so highly leveraged with debt compared to newer and smaller companies.
If all other countries keep their interest rates the same and the U.S. increases rates, then in theory the demand for dollars should rise. If the interest rate offered at U.S. banks for saving accounts, CDs, T-Bills…increases compared to all other countries, then investors will demand more dollar denominated investments compared to other country currencies. This will put positive pressure on the dollar’s valuation.
Look for companies that have 50% or more of their revenues in dollars. If the dollar gains value, so does all of the revenue they bring in and thus the company is more valuable (until the dollar’s valuation heads south…).
The next part of this episode will highlight a few companies I believe would be good examples of companies to hold in your portfolio, if the Fed increases rates. We’ll use them as an example to help you with your research.