I am Furqan Punjani and I have been a retail investor and a financial analyst for 15 years now! My only goal right now is to help SIMPLE RETAIL INVESTORS make money from the stock market. This newsletter and this free stock market course, are to help investors become better investors. Paid community launched - details below!

Our website has everything we have done so far!

Topic: a 3% interest rate hike coming - now what?

The market now expects that there will be a 2/3% interest rate increase in the next monetary policy meeting. This resulted in institutions selling what they had, in anticipation, of buying it back at a lower rate. They have been successful.

But as a simple retail investor, this may be too much technical for you.

So let me:

• First, explain the general effects of interest rate hikes on the growth stocks and dividends stocks, and then

• Give you an opinion as to how should you manage your portfolio!

Effects of +2/3% interest rates on the growth stocks

Whenever interest rates go up, growth stocks are hurt in three ways:

1. Fall in general demand - How many people do you think will be building a house or buying a new car now? And since most of the growth companies in Pakistan depend on local general demand, their sales should either fall or grow more slowly than before this 3% hike.

2. Growth companies take debts to increase their capacities which makes them a growth company. However, when the interest rates go up, their finance cost also. This means, that while their sales or sales growth is falling + their profits are hurt by higher financial costs. And lastly

3. When interest rates go up, the carrying cost of fund for you also go up! Think like this, If you are getting 25% risk-free, would you bet on a growth company whose sales and profits are falling and you have no idea when will the situation improve?

Effects of +2/3% interest rates on the dividends stocks

These companies are impacted much less because:

1. Inherently these companies are mature,

2. They make good profits and pay them out as dividends and

3. Their demand is not sensitive to interest rates.

However, they aren’t immune to this. Their stock prices may come down but only to the extent of the difference between their dividend yield and interest rates.

Example:

If their dividend yield is say 20% at a time when the interest rates were 20% and if now the interest rates increase to say 25% - the stock price will come down by 20%.

Stock price: Rs100
Dividend: Rs20/sh
Dividend yield = 20% (20/100)

After a 5% increase in the interest rates

Stock price: Rs80
Dividend: Rs20/sh
Dividend yield = 25% (20/80)

This is technically true but since this stock’s earnings will also be growing the next year, the fall in the stock price might be lower than 20%!

Takeaway: How to manage your portfolio in times like these?

Decide right now why are you in the stock market in the first place. If you are for capital gains, then:

• Choose growth stocks wisely, and

• Be ready for falls like we saw last week

Advice: In times when interest rates are going up, the best approach will be to do SIP! Use the fall to buy growth stocks at a much lower price and prepare for the next rally - not the next month’s return.

But if you are here to generate passive income then:

• Choose stocks that are consistent in paying dividends, and

• Their dividend yields are higher than current interest rates.

Advice: If you do this properly, not only will your returns be better in times like these but your dividends will improve year by year + safe capital gains when the easing cycle starts.

New in the paid community:

Stock Idea - FFC: When cash flows grow but no one notices!

You have a milk shop and the government asks you to sell milk for not more than Rs100/ltr. However, the demand is so high that every day someone buys your milk at Rs100/ltr, and sells it on his stall in front of your shop at Rs200/ltr.

How would you feel about it? And how should you use this situation?

This is what Fauji Fertilizer must have been feeling!

Detailed stock idea video (+ Model Portfolio for Sep’23) published on the paid community! If you want to be a part of it, here is the link!

This is not a public launch, I am looking for founding members (max 50) to build this community with!

Last week I spent my free time on:

US Stocks: ADYEN - a growth stock within FinTech

If PayPal is a value stock in the global FinTech (cash flows, buyback, etc.), Adyen is its counterpart - a growth stock! I was surprised to see a company charging a premium for its payment services while others fight for market share. This explained to me how a commodity-type service/product company can differentiate itself!

In this article:

• How the payment industry works and

• How Adyen is so much different than an average fintech company.

Have a read!