CRE Companies Should Pay Attention to the Consumer Discretionary and Financial Sectors as Bond Yield
With higher interest rates on the horizon, there are many in commercial real estate who only know a world of easy credit. Low cost access to commercial credit is not a given, and while companies in some industries are likely to face greater headwinds from rising rates (we will cover them in a later post), firms in several key sectors are likely to benefit from the emerging era of higher yields. So which sectors are poised to benefit?
Following a bumpy ride in consumer confidence over the past four years, Americans are feeling better about their spending power. In an earlier post we talked about wage growth and how it could portend the emergence of inflation, but in the short-run, consumer discretionary spending is up as Americans feel like they have more disposable income. While the consumer discretionary sector can be fickle, an expanding economy tends to drive revenue in entertainment and leisure, apparel, luxury, and automotive companies. Of course, if growth overheats, and rate growth flattens or falls, consumer confidence could follow suit, buffeting the sector with weaker demand. Look out for companies with elevated leverage though, as increasing rates could increase additional borrowing or refinancing costs.
Financial service and insurance companies are often the beneficiaries of a bull market and rising interest rates. Increases in short- and long-term rates are likely to boost net interest income. On top of higher rates, the potential for additional regulatory rollback with the current administration could reduce non-interest expenses and widen margins for financial sector companies. Thus, banks, lenders, and insurance companies will likely find it an easier operating environment. Banks and insurance companies may doubly benefit from increased economic activity and related trading revenue, further expanding margins and earnings.
If you believe the U.S. and global markets are poised for sustained growth, then many companies in the sectors outlined above may lay the groundwork for a stronger tenant base.