As we approach the end of 2016 it is as good a time as any to stop and consider what trends will pervade financial markets in the year ahead. Specifically, we should think about how we can position our portfolios to benefit.
One of key trends that I think will become evident in 2017 is what is being dubbed as 'the great unwind'. This trend will see central banks moderate or drop their easing biases. Further, global interest rates could trend upwards as the U.S. economy and parts of Europe begin their return to growth.
That may sound like a bold call, I know. But if I am right, some S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) companies could be seriously affected by higher interest rates.
For example, if interest rates rise and yields on debt increase you can bet property investors will be hurt. That does not mean that they will fall to their knees. However, when higher borrowing costs are coupled with wider discount rates on property valuations, returns can reasonably be expected to moderate.
Under those conditions, real estate investment trusts (REITs) and property focused businesses with high levels of debt will find growth harder to come by. I think GPT Group (ASX: GPT) and Cromwell Property Group (ASX: CMW) are two of the better property businesses on the ASX; however, neither are buy today in my book. That is despite them both offering big dividend yields.
Another Australian company that may find it difficult to get traction in 2017 is Telstra Corporation Ltd (ASX: TLS). While the company has benefitted from investors seeking big dividends its organic growth potential appears anaemic.
I think savvy investors can benefit from the big dividends on offer in the market if they play their cards right.
For example, Commonwealth Bank of Australia (ASX: CBA) is not likely to grow its profits rapidly in coming years, but it could benefit from rising interest rates. At the very least I think it is one for the watchlist.
Finally, I think Retail Food Group Limited (ASX: RFG) has room to run over the long term. The casual dining business owns names like Gloria Jean's, Crust Pizza, Pizza Capers and much more. While retailers are fickle at the best of times, its valuation is not overly demanding at today's prices.
Foolish takeaway
Interest rates should not make or break an investment thesis. We should strive to find companies that can grow under any conditions. However, when — not if — interest rates rise, the bets on property may grind to a halt.
