US 10 year treasury yields have recently hit a 14-month low. This was after the US central bank indicated that they will not hike rates for the rest of the year. Bond traders are therefore not optimistic about the economy. In Australia, interest rates have remained low for the last few years and the slowdown of the property market will also encourage regulators to keep rates low. Household consumption is predicted to decrease from the slowdown in the economy. Despite the negative news there are always opportunities in the market to be found. Here are some stocks ideas that investors could implement in an environment of low interest rates.
Consumer spending is slow in a low interest rate environment so investors need to be to selective on the sectors to invest in. They should look at industries that are booming despite the economic slowdown. Some of these sectors could include technology and healthcare. Healthcare is a growing industry as the aging population increases. Health care is the largest employing industry in Australia with 13% of the population employed in that area.
2.Small to mid-cap sectors
In a low interest rate environment, investors looking for capital growth in shares should look at small to mid-cap sectors. These sectors provide more opportunity for growth compared to big cap stocks. Investing in companies in a low interest rate environment can be difficult as earnings growth may be hard to find from blue chip companies. Small caps however may do better in low interest rate environment. These companies usually need financing to grow the business so they benefit from low interest rates benefit as the borrowing cost are lower.
Small caps can move independently of the market as the stock price can be affected company news rather than macro stories. Larger companies tend to be correlated with the market, so if the market falls so will the big chip stocks.
Investors should look for small cap stocks experiencing sales growth and have a competitive product.
Investors should look at companies which will disrupt industries by doing business differently. Such companies are likely to experience growth from an innovative approach. Examples of this include Netflix, Amazon and UBER.
4.Products/Services consumers still use despite an economic downturn
In times of economic downturns, consumers tighten spending so they are more selective with their purchases and may cut down on non-essential items or services. Investors should look at companies where consumers continue to use the services despite weak economic conditions. These companies should have a product/service where they can hike prices up but still retain consumers. Some examples are stocks in healthcare, waste removal, infrastructure or utilities. Consumers will still require those services in a low interest environment so demand will not decrease from a decline in disposable income.
5.Buy REITS and Infrastructure
Low interest rates can be discouraging for investors who are searching for income. Infrastructure stocks can be popular during low interest rate periods as investors look for alternatives for good income. REITS also provide a good source of income and are a defensive sector. These are sometimes referred as bond proxies as they are shares but offer a steady income stream similar to bonds.
Lauren Hua is a private client adviser at Fairmont Equities.
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