Three stocks to sell as interest rates rise
The Bank of England has raised interest rates by 0.5 percentage points to 4pc, the highest level since the financial crisis.
Last year rate increases across the globe triggered a stock market sell-off, as the rising cost of borrowing took the steam out of a decade’s worth of debt-fuelled growth.
But some stocks are more vulnerable to rate rises than others. The Telegraph looks at which British shares look fragile as the Bank Rate continues to rise.
Policymakers use higher interest rates to encourage people to save rather than spend or borrow. This is a good tool in fighting against inflation, but it means that consumer-facing industries struggle as household budgets tighten. Experts warned electronics retailer Currys could suffer.
Sophie Lund-Yates, of the broker Hargreaves Lansdown, said: “Currys sells expensive electric gadgets, ranging from laptops to washing machines. Unfortunately, these are exactly the sort of items people hold off from buying while economic conditions are tough.”
Ms Yates pointed to a 6pc drop in sales in the 10 weeks ended January 7, usually considered the peak trading period, compared with the year prior.
“While performance has been better than expected, that’s not the same as saying the group is thriving,” she said. “There is huge competitive pressure in the electrical industry, with many customers looking for the cheapest product online. Overall, conditions are not supportive for Currys’ already thin operating margins, which are expected to be just 1pc for the full year.”
Households are likely to cut back on other areas of unnecessary spending – such as takeaway dinners – when their finances are squeezed. Takeaway delivery service Deliveroo could suffer as people choose to cook at home rather than order in.
Ms Yates said: “This is an especially tricky situation for Deliveroo which specialises in more expensive restaurant-grade takeaways, and weakening consumer confidence is likely to kick the group’s issue of profitability further down the road.”
She added: “There’s a chance some customers might turn to Deliveroo in place of a more expensive night out in a physical restaurant, but the net effect of rising interest rates is likely to be challenging.”
Engineering business Rolls-Royce is also vulnerable to rising rates, experts warned. Susannah Streeter, also of Hargreaves Lansdown, warned that the firm’s debts could limit future expansion.
She said: “For now the company is benefiting from a fixed interest rate [on existing borrowing] so it’s not flying into a danger zone any time soon, but its debt burden will limit investment into other areas of potential growth.”
Shares in Rolls-Royce have lost 10pc of their value in the past year, but have rebounded 18pc in the last six months as air travel has slowly improved and investors snapped up cheap stocks. However, as household finances are squeezed, Rolls-Royce could feel the impact of reduced demand in the airline industry, to which it supplies engines.
Ms Streeter said: “More expensive long haul travel tickets may be the first to be scratched off ‘nice to have’ lists as the cost of living crisis intensifies.”