Like quality hard rock, the Aussie cash rate has been in a 30-year nosedive. From the grandiose heights of 17.5% (let’s call it Nirvana’s Nevermind) to where we are now, the first rise for official interest rates is the first step away from what has been an extraordinarily potent record low of 0.1%.

And since the first tickling-throats of a new pandemic began to splutter in early 2020, the RBA has been planning, and then rolling out the emergency monetary and fiscal policy settings we’ve been enjoying, nay, revelling in unprecedented low rates with wonderful, unconventional broad measures, including quantitative easing, which have been in place since the Global Financial Crisis (GFC). That boat hasn’t sailed, but more sunk. So with monetary policy about-facing investors need to be all over what rising interest rates mean for the value of equities.

Them Cyclical sectors are them sectors what typically outperform during times when the local music industry is reviving and interest rates are rising. These include the major banks, the financial and resources sector and consumer discretionary, typically among the pro-cyclical sectors likely to have crack when rates get going.

Cyclical sectors include:

  • Materials
  • Consumer Discretionary
  • Financial Services
  • Real Estate

Them Non-cyclicals usually are in the business of essential, bloody useful or must have goods, stuff and services. They don’t care what’s happening because they aren’t impacted by discretionary spending. Telcos work because you’ve got to have the internet and a phone regardless of how crap or great it’s all getting.

Non-cyclical sectors include:

  • Utilities
  • Healthcare
  • Telcos
  • Consumer Staples

A good time to revisit the ideas and insights of TAMIM Asset Management’s head of Australian equities Ron Shamgar, from back in February.

“2022 didn’t kick off like most people were hoping,” Shamgar said.

“January was at one stage the worst start to a year on record with S&P500 down -11%.

“The 10 largest stocks on the index were down -20% at one point and the average Nasdaq stock was down -50%.”

In Australia, the tech index hit an intra-month low of -25% and the Small Ords was down -13% at one point.

Although there has been a bounce back in equity markets this week, Shamgar said one could argue we are in bear market territory based on some of those figures above.

“In our view this is all caused by inflation concerns which will lead to higher interest rates this year and next,” he said.

“We are of the view that rates going to 2-2.5% won’t tip us into a recession and inflation will ease in 12 months as COVID related supply bottlenecks and labour shortages ease up.”

Some companies are significant beneficiaries from inflationary environments and higher interest rates – here are three stocks Shamgar reckons will benefit.
 

Ron Shamgar selects:

EML PAYMENTS (ASX:EML)

Shamgar believes EML is the number one ASX beneficiary from rising rates.

“As an e-money issuer globally, they currently hold a growing balance of customer card funds worth $2 billion.

“EML gets to invest those funds but at the moment, with rates at zero, aren’t making any return.

“Going forward investors should think about that for every 1% rise in rates across US/UK/Euro, EML earns $20m of incremental profit.

“Hence if rates rise 2-3% next couple of years, EML will earn an incremental $40-60m of profit – which is 2-3x their current profitability.

“We don’t believe investors have fully grasped this and this is why EML is our top pick for 2022.
 
PEOPLEIN (ASX:PPE)

PPE is a provider of workforce solutions mainly in health and IT.

Shamgar said the company provided a robust update last week confirming FY22 earnings to be within analyst expectations (PE multiple of 12x).

“Their business is a massive beneficiary of wage inflation driving higher margins as they earn a commission.

“In addition, low levels of unemployment in Australia, and a high turnover of employees, are all factors seeing higher demand for PPE services.”

With the borders reopening, Shamgar said PPE should continue to benefit from resumption of international labour.

“The next catalyst for the stock are acquisitions which they have been very disciplined on,” he said.

“Our valuation is $5.00.”
 
OFX (ASX:OFX)

OFX is provider of Forex services to consumers and corporates globally.

“As revenue is transaction based, OFX is a beneficiary of elevated inflation,” Shamgar explained.

“Last week OFX provided Q3 update which was strong with revenues up 21% to $39M.

“Management has upgraded FY22 guidance from 10% growth to 17-22% revenue growth and we think that’s conservative based purely on Q3 run rate.

“The recent acquisition of Firma in Canada should see EBITDA grow to $55M in FY23 which places OFX on 10x EV/EBITDA valuation.

“This in our view is cheap compared to global peers and we think OFX is worth $3.00.”

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