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Old 04-23-2021, 11:19 AM   #2
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Join Date: Sep 2008

One thing I've been thinking about lately in respect to investing is the potential for higher inflation and/or interest rates. Interest rates have been on a downward path my entire investing lifetime, and I think we're probably at the bottom at this time (arguments why that isn't the case welcomed!).

I've been thinking about portfolio construction in a higher interest rate world, and have had the following thoughts. I'd love other folks opinions as well.

-Higher rates are bad for growth type stocks. When interest rates are low, the discount rate investors use in a DCF is also naturally low. Take a fast growth company with zero earnings now but potentially huge earnings 10 years out. If you discount those future earnings at 2% they're worth a lot more than if you discount them at 8%. A company whose earnings are mostly short term is less affected. I think that could cause an even bigger rotation from growth industries (tech, biotech, etc) to dying industries (eg oil and gas, retail).

-Inflation seems to be hitting real estate prices hard, especially residential. Residential land developers seem like an interesting way to invest in that trend. I'm not sure about other forms of real estate. Offices and retail REITs are way cheaper than residential focused ones, but they have some obsolescence risk.

-Higher interest rates are generally good for financials, but even more than that is the yield curve steepening. The banks should benefit from a steepening yield curve (and the government is selling lots of long term debt which will raise long rates while the BoC is holding short rates low). I also like brokerages - they pay 0% on cash and lend it out at margin interest rates. Their spreads will rise as rates go up. Plus the huge volatility we are seeing adds to trading volumes.
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