As the Bank of England meets today, it’s expected its committee will raise interest rates by another 0.25%. This will take the base rate to 5.25%. The rapid rise in the base rate over the past year has put pressure on many companies. Yet there are some shares to buy that actually have performed well despite the increases.
Here are three that I’m strongly thinking about buying soon.
HSBC (LSE:HSBA) is one of the largest banks in the world. Even though it has divisions that make money from advisory services or trading, the core business model revolves around deposits and loans. The bank essentially make a spread between the rate it pays on deposits versus what it charges on loans.
The higher the base rate, the larger this spread is. Officially, it’s know as the net interest margin (NIM). Over the course of the past year, this margin has been rising and rising.
Evidence of the benefit can be clearly seen in the jump in profit from H1 2022 to H1 2023. Pre-tax profit was $9.2bn in H1 2022, which then soared to $21.7bn this year.
In the report, a large factor in this was the net interest income. The share price has jumped 18% in the past year.
As a risk, the bank will be hindered if interest rates keep rising as it could force mortgage and other loan defaults.
Winning against peers
Sage Group (LSE:SGE) is an global enterprise software company. The stock is up an impressive 41% over the past year.
The top line revenue has been growing consistently in recent years, with a big push in cloud computing and finance software helping to lead the way.
Yet another factor I believe has helped the business is the competitive advantage it has with low debt. In the half-year report, the debt to EBITDA ratio was just 1.3x. This is a very low ratio and shows to me that the business doesn’t have anything to worry about with the borrowings.
However, growth stocks in the cloud computing space often have very high debt levels to help fuel fast growth. Higher interest rates make it more expensive to take on new debt, costing more in interest repayments.
Therefore, I think Sage Group is actually benefitting over it’s rivals as it isn’t feeling the pinch of higher debt costs.
Providing high income
Finally, I’ve noted TwentyFour Income Fund (LSE:TFIF). The stock is down 4% over the past year.
The fund specifically targets bonds and other asset-backed securities to invest in. This includes products like mortgages. As interest rates climb, the yield on these kind of assets increases. So the business has really benefited from being able to generate more income for shareholders over the past year.
Evidence of this can be seen from the dividend yield, which currently sits at a juicy 9.88%. I feel this yield is sustainable as long as interest rates stay elevated.
Granted, the area that TwentyFour operates in is pretty niche. This means it’s concentrated in the investments it makes. There’s very limited diversification to protect it if this part of the market has a wobble.