Due to inflation, which is currently peaking, UK interest rates are rising. In December, the Bank of England raised its key rate from 0.1% to 0.25%. Tomorrow, the central bank is expected to raise rates again, to 0.5%.
Higher interest rates should benefit many companies that operate in the financial services sector. With that in mind, here’s a look at two FTSE100 stocks I would buy today to take advantage of the rising rate environment.
Higher interest rates are good for banks
In my view, one stock that definitely has the potential to rise as rates rise is Lloyds banking group (LSE: LLOY). It is the UK’s largest lender with loans of over £40bn.
I think Lloyds shares could go up as interest rates in the UK go up because banks tend to get a lot of their income from the spread between their borrowing rates and their interest rates ready. The higher the interest rates, the greater the spread they can generate. This means that higher rates are great news for Lloyds.
Lloyds shares have had a strong run over the past 12 months, rising more than 50%. However, the stock’s valuation remains low. Currently, it has a forward-looking price-to-earnings (P/E) ratio of just 8.1. This is well below the average FTSE 100 P/E ratio. This leads me to believe that there is room for other benefits here.
Of course, my investment thesis involves risks. One is general market volatility. When markets are turbulent, Lloyds shares also tend to be quite volatile. For example, in the market selloff last month, Lloyds fell more than 10%. We could see its shares pull back again this year if volatility returns.
All things considered though, I think the risk/reward proposition here is favorable with rising interest rates.
Stock price on the rise
Another FTSE 100 company that could benefit from higher rates is Hargreaves Lansdown (LSE: HL). It is the largest investment platform in the UK, with assets under management of over £100 billion.
The reason Hargreaves Lansdown may well benefit from higher rates is that the company makes money on customer cash deposits. In the previous financial year, for example, it generated revenue of around £51 million from cash deposits. The previous year, it generated £91million in cash income. If rates go up, Hargreaves’ revenue should increase significantly. This should increase earnings which, in turn, should drive up the stock price.
Hargreaves Lansdown shares have underperformed over the past few years and as a result the stock’s valuation is now much lower than it was before. For the year ending June 30, analysts expect the group to post earnings per share of 54p. This means that the P/E ratio here is around 25.
I think the valuation is quite reasonable, given the company’s market position and its long-term growth potential. So I wouldn’t be surprised if the stock goes up as interest rates go up.
One risk to consider here is competition from new rivals. Companies like Freetrade and Trading 212 have seen a lot of success recently due to their low fees.
I’m confident about the growth story here though. I have used many investment platforms over the years, and I believe Hargreaves Lansdown has a world class platform.
Post 2 FTSE 100 stocks that could boom as UK interest rates rise appeared first on The Motley Fool UK.
Edward Sheldon owns Hargreaves Lansdown and Lloyds Banking Group. The Motley Fool UK recommended Hargreaves Lansdown and Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2022