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Treasury interest rates have risen, and Wall Street has comes with lots of stock ideas to the apartment. There is just a questionhowever: interest rates – and especially inflation-adjusted interest rates – are still very low.
The “real” US 10-year return measured by the return on 10-year government inflation-protected securities closed at -1.01% on Friday, not too far from its at least 18-year-old low at -1.08% set in January. Even after the 10-year Treasury rate rise of about 0.45 percentage points over the last four months to 1.2%, Wall Street expects it to remain below 2% until the end of the year or the beginning of next year.
It changes the picture of the stock market. The initial concern has been that as government bond yields rise, investors will move back to bonds and close stocks, as government bonds offer more security and higher payouts.
But with low and real-time interest rates lower, the dynamics may not be as strong headwinds for some stocks as investors might think strategists at
Goldman Sachs
say.
“Once the market has fully priced an economic recovery, we expect investors to once again be confronted with a macro background of US GDP growth below 2% and interest rates below 2%,” the bank wrote in a note on 7 February.
Specifically, rising interest rates may not cause as much pain as feared by a group of stocks with what the bank calls “long-term”, a game of the bond market concept. It includes shares in companies with sales growth and returns that are expected far into the future, which means that these future returns will be discounted at a higher rate when government interest rates rise.
Some of these “long-term” games include the technology companies in the Nasdaq Composite, as well as growth stocks such as those tracked by the iShares Russell 1000 Growth exchange-trading fund (IWF), the bank wrote in a note from 10 February.
So far, investors seem to be putting more of a premium on short-term growth instead, according to the bank. Overall, equities with “long durations” have been underperforming comparable to peers since late October, corresponding to the rise in the Treasury, strategists found.
This trend may not last – yet while it does, “long-term” stocks look more attractive compared to their peers, the strategists wrote, especially with the S&P 500 trading at high valuations relative to history.
Of course, some “long-term” stocks probably deserve to trade at a discount. For example, if they do not have much exposure to economic growth, they may not be able to capture the benefits of reopening.
So within the group of growth companies expected to be longer in the future than their peers, Goldman Sachs also screened for cyclical stocks or those with strong exposure to the pace of global economic expansion.
“The compromise strategy offers the best of both worlds, albeit with compromises with less extraordinary returns than pure growth stocks or cyclical in environments that specifically promote only one of these strategies,” the bank wrote.
A selection of the bank’s choices can be found below with price movements and valuations based on data from February 11 from FactSet. The initial list included a significant number of retail and capital goods companies, but strategists highlighted that Covid-19-related shutdowns may have distorted the sales growth figures of these sectors, an important input to their “duration” calculations.
So names of retail and capital goods were excluded from the list, which is heavy on technology stocks, with materials and transportation companies. These 14 stocks should be placed to capture part of the economic recovery, and if Goldman Sachs’ screening method is correct, it will also provide long-term growth.
Note: P / E and YTD price per. February 11th. Implied duration based on Goldman Sachs’ calculations.
Sources: Goldman Sachs Global Investment Research, FactSet
Write to Alexandra Scaggs at [email protected]
