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Analyst consensus expects the Bank of England committee to increase interest rates three times over the coming year. I agree with this view. Even though higher interest rates are typically negative for the stocks market, some FTSE stocks do actually outperform in this environment. Here’s one example worth taking note of.
Higher for longer
I’m talking about AJ Bell (LSE:AJB). The online investment platform has enjoyed a 10% rise over the past year. But before I get onto the reasons driving the move, let’s talk about interest rates.
AJ Bell generates interest income from cash balances held in customers’ investment accounts, including ISAs and SIPPs. Higher interest rates could increase the returns earned on these deposits, providing an additional revenue stream alongside its traditional platform fees.
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Importantly, AJ Bell has a growing customer base. In its October trading update, it reported that customer numbers had increased by 24% over the financial year to 796,000.
Meanwhile, assets under administration jumped 22% to a record £126bn. This provides a substantial platform from which to generate additional interest income. So it gets a double helping, namely a higher margin from cash from a growing pool of clients.
Unlike traditional banks, it also has limited direct exposure to loan defaults. Typically, higher interest rates can hurt banks as they take the losses from people not being able to afford paying back loans with high borrowing costs. AJ Bell doesn’t have this issue, making it a potentially attractive way to benefit from monetary tightening.
Other elements
There are two other points I wanted to flag about the firm looking forward. One is that the structural growth of the UK investment market offers opportunities. I can’t be the only one to have noticed that more individuals are taking responsibility for retirement planning. Demand for tax-efficient investment products such as ISAs and SIPPs remains significant.
AJ Bell’s relatively low-cost platform should help it attract customers from more expensive competitors.
The other element is that its investment management division is expanding rapidly. In the latest update, assets under management rose 36% to £12.1bn. This provides another source of recurring revenue, not linked to interest rates.
The broader view
A sharp stock market correction would reduce assets under administration, potentially weighing on fee income. Higher interest rates could also discourage investing and put pressure on stocks.
Competition from the likes of Hargreaves Lansdown could force AJ Bell to reduce charges.
Yet none of those risks are prominent enough right now on my radar to make me want to steer clear. So when I bring it all together, I predict that higher interest rates will help the stock rally, more so than traditional banks. When I get some free cash I’ll be looking to invest.
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Jon Smith has no positions in the shares mentioned.
This story originally appeared on Motley Fool
