5 UK Stocks Set To Profit From The Fed Raising Rates: ICAP PLC, Tullet Prebon Plc, Barclays Plc, Hiscox Ltd & Beazley Plc

If you’re worried about interest rates then ICAP PLC (LON: IAP), Tullett Prebon Plc (LON: TLPR), Barclays Plc (LON: BARC), Hiscox Ltd (LON: HSX) and Beazley Plc (LON: BEZ) could be the lifeboat you’re looking for!

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With Thursday’s Federal Open Market Committee (FOMC) meeting fast approaching and a weak consensus suggesting that the Fed may finally raise interest rates from their record lows, many investors will probably be wondering where they will turn to if markets take a southward turn over the coming months.

It is with this in mind that I turn my own thoughts on one or two areas which are of particular interest to me.

Inter-dealer brokers are a fantastic play on the changing winds of monetary policy…

Inter-dealer brokers like ICAP (LSE: IAP) and Tullett Prebon (LSE: TLPR) have long lamented the pains of ultra low interest rates, low market volatility and reduced trading activity at the banks. However, ever more hawkish noises emerging from the Federal Reserve and the Bank of England are a sign that the outlook is beginning to brighten for these companies.

Given that their revenues and earnings (commissions) are largely dependent upon transaction volumes within financial markets, as opposed to the overall direction of the underlying asset prices, rising interest rates are great news for inter-dealer brokers.

Some shrewd investors saw this opportunity a long time ago and bought both companies heavily, prompting notable gains in the shares over the last 12-18 months. However, with transaction volumes still some 30% below their pre financial crisis peaks, the current recovery could still have legs to go further in the coming quarters.

In addition to their advantageous position when it comes to rates, both companies are much more attractive from a risk perspective, relative to the banks and asset managers. Most notably because they lack the heavy balance sheets, mortgage credit risks and the exposure to the overall direction of markets that many of these comparative companies have.

Furthermore, on a price-to-earnings basis, valuations are also reasonable — with Icap trading on 16.1x and Tullett at 15.5x 2014 earnings. This compares favourably with the riskier banks, insurance companies and asset managers, whose current multiples range from 15x to 19x 2014 EPS.

As a result, Tullett and ICAP are two companies that I will be keeping a very close eye on over the coming quarters.

Did I mention insurance companies already, non-life insurance companies?

I wrote at length about this recently; however, it is an idea that is well worth a quick recap as this industry is also one of the fortunate few that will benefit from higher rates over the medium term.

Given that Hiscox (LSE: HSX) and Beazley (LSE: BEZ) were among the non-life companies to derive a considerable portion of their earnings from their bond portfolios before the financial crisis, they should also be among those to benefit from a gradual push higher in rates.

Furthermore, on a price-to-earnings basis, both companies are also attractively valued with each trading at a discount to the wider non-life sector as well as the riskier banking sector.

Given that the non-life sector currently averages 17.8x and the banking sector 19.2x 2014 earnings, the 14.4x multiple at Hiscox and the 13.7x figure at Beazley are particularly attractive when considering the medium term outlook for earnings.

You can read more about my view on insurance here.

Barclays could also be worth a go, for those with the requisite stomach…

If, for whatever reason, the above industries are not of interest, then you might like to consider a company like Barclays (LSE: BARC), whose fixed income, currencies and commodities (FICC) business has been the bane of its existence of late.

With interest rate and FX volatility likely to return to markets over the coming quarters, the once-prized FICC business could soon begin to make a more meaningful contribution to earnings.

However, those that do venture here would do well to consider the potential for further skeletons to emerge from the closet, in addition to the group’s complex capital structure that sees most of its earnings eaten by bondholders.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Skinner owns shares in ICAP & Beazley. The Motley Fool UK has recommended Barclays and Beazley. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »