Apr 29, 2022
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The Federal Reserve has voiced its desire to calm spiking inflation. But Nomura expects the Fed to be even more hawkish than they’re letting on.
In a recent update, the global investment bank says it sees rates faster than previously anticipated. They’re now calling for a 75 basis point hike in June and July, which will follow the 50 basis point hike that’s expected in May.
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“Our U.S. team has changed their Fed call,” writes Rob Subbaraman, head of global markets research at Nomura, in an email. “They now expect the FOMC to be even more front-loaded with rate hikes, in order to get the funds rate back to neutral as expeditiously as possible to avoid a wage-price spiral.”
Here are three stocks that can help you protect your portfolio in an environment of rapidly rising rates.
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Bank of America (BAC)
Bank of America is a $295 billion financial holding company, with a leading U.S. and global footprint.
Generally speaking, the banking business is positively impacted by rising interest rates. When rates increase, the spread between what banks charge in interest and what they pay out widens.
Bank of America has a high proportion of its assets in low-cost consumer deposits relative to peers. In other words, rising interest rates should benefit Bank of America to a greater degree than many of its competitors. Conservative underwriting and a measured risk-taking appetite should also help the bank take advantage of its scale and opportunities in a responsible way.
The bank is enjoying resilient consumer and strong lending markets. Over the past few quarters, earnings have come in better than expected.
Bank of America shares are down 20% so far in 2022. Rapidly rising rates could serve as a powerful turnaround catalyst.
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Merck (MRK)
Healthcare companies can also serve as a safe haven in a rising rate environment. Their resilient nature makes them relatively immune to the economic turbulence that higher rates can bring.
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On top of that, the healthcare sector hasn’t exactly soared in recent years, so valuations are compelling.
Healthcare giant Merck — a $214 billion global healthcare company — represents a solid way to gain access to the sector. It has leading oncology and cardiovascular disease franchises.
2021 was a strong year for Merck. It posted revenue and EPS growth of 17% and 7.3%, respectively, due to strong operational momentum. Currently, the stock offers a dividend yield of 3.2%.
Cheniere Energy (LNG)
Cheniere Energy is the leading producer and exporter of liquefied natural gas in the U.S. Thanks to white-hot inflation, the company is benefiting from soaring natural gas prices. Since interest rates are tied to rising energy prices, Chenier looks like a particularly timely opportunity.
Cheniere is also enjoying a very favorable global supply/demand dynamic, which shows no signs of letting up. Last month, U.S. LNG exports rose 16% to a record high as European countries tried to cut down on Russian gas imports.
Record global LNG demand has resulted in record revenue, volumes and cash flow for Cheniere. The shares are up an impressive 36% in 2022.
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Karen Thomas, CFA, is a freelance contributor to Moneywise.
