As a result of inflation, which is sky-high right now, UK interest rates are rising. In December, the Bank of England lifted its base rate from 0.1% to 0.25%. Tomorrow, the central bank is expected to raise rates again, to 0.5%.
Higher interest rates are likely to benefit many companies that operate in the financial services sector. With that in mind, here’s a look at two FTSE 100 stocks I’d buy today to capitalise on the rate-rising environment.
Higher interest rates are good for banks
One stock that certainly has the potential to move higher as rates rise, in my view, is Lloyds Banking Group (LSE: LLOY). It’s the largest lender in the UK with loans of over £40bn.
I believe Lloyds shares could rise as UK interest rates climb because banks tend to earn a large chunk of their income from the spread between their borrowing rates and their lending rates. The higher interest rates are, the larger the spread they can generate. This means higher rates are great news for Lloyds.
Lloyds shares have had a good run over the last 12 months, rising more than 50%. However, the valuation on the stock remains low. Currently, it has a forward-looking price-to-earnings (P/E) ratio of just 8.1. That’s well below the average FTSE 100 P/E ratio. This leads me to believe there’s room for further upside here.
Of course, there are risks to my investment thesis. One is general market volatility. When markets are turbulent, Lloyds shares also tend to be quite volatile. For example, during the market sell-off last month, Lloyds fell more than 10%. We could see its shares pull back again this year if volatility returns.
All things considered however, I think the risk/reward proposition here is favourable with interest rates rising.
Share price upside
Another FTSE 100 company that could benefit from higher rates is Hargreaves Lansdown (LSE: HL). It’s the largest investment platform in the UK, with assets under administration of over £100bn.
The reason Hargreaves Lansdown could do well as rates move higher is that the company earns money on clients’ cash deposits. Last financial year, for example, it generated revenue of around £51m from cash deposits. The year before, it generated £91m in cash revenue. If rates move higher, Hargreaves’ revenues are likely to get a significant boost. This should lift profits which, in turn, should boost the share price.
Hargreaves Lansdown shares have underperformed over the last few years and as a result, the stock’s valuation is now much lower than it used to be. For the year ending 30 June, analysts expect the group to post earnings per share of 54p. This means the P/E ratio here is about 25.
I think that valuation is quite reasonable, given the company’s market position and long-term growth potential. So I wouldn’t be surprised if the stock moves higher as interest rates rise.
One risk to consider here is competition from new rivals. Companies like Freetrade and Trading 212 have been having a lot of success recently due to their low fees.
I’m confident in relation to the growth story here however. I’ve used a lot of investment platforms over the years, and I think Hargreaves Lansdown has a world-class platform.
