As interest rates in the U.S. rise, investors can put their money to work by looking at companies in the S&P 500 that can “increase their prices” and “maintain margins,” Kevin O’Leary told CNBC.
“There’s plenty of them. That’s a good place to hide when you’re getting a 2% dividend yield,” the celebrity investor said Thursday on “Squawk Box Asia.”
O’Leary’s comments came after the Federal Reserve increased its benchmark interest rate by half a percentage point on Wednesday, in line with market expectations.
Fed Chair Jerome Powell had indicated that raising rates by 75 basis points “is not something the committee is actively considering,” even though market expectations have leaned heavily toward the Fed hiking by three-quarters of a percentage point in June.
Similarly, O’Leary cast doubts on such a steep hike, adding that markets are still “in the cycle of growth.”
“I don’t think that’s going to happen. You’ve got lots of concerns in Europe, you’ve got the Russian invasion of Ukraine. You’ve got supply chain issues around wheat and commodities coming because Ukrainians are not going to put winter wheat in,” he said.
“There [are] lots of things to worry about, which I think holds back the Fed. And that’s your friend.”
“I think the question you have to answer is: Can Powell basically glide the plane in for a soft landing? If you think he can, like I do, you stay in long equities,” said the venture capitalist, who is also co-host of “Shark Tank” and chairman of O’Shares ETFs.
“The market, by the end of the year, [will go through] a lot of volatility — a lot more 1000-points days,” he said, referring to the Dow Jones Industrial Average which plunged 1,063 points after the rate hike on Wednesday.
The impact of inflation on cash and increased interest rates on long bonds — like the U.S. 10-year Treasury bond — also leave little optionality for people, O’Leary said. This is why he said he would focus on equity markets, and buy shares of companies that have “some semblance of pricing power.”
“It’s the most tenable, it’s the most protective of capital. Equities still perform in inflationary times … you may argue that it’s not enough pricing power, but it’s way better than the long bond. And it’s certainly better than cash right now.”
Where to find compelling yield
Asked where investors can find the most compelling returns in the current market, O’Leary narrowed it down to energy and health-care stocks.
“I think energy has been a real bellwether in terms of providing dividend yields, some of these stocks and now up to 7, 8, 9%,” he said.
“People are concerned about what’s going to happen to the price of oil. But Russia being sanctioned will probably maintain prices where they are here. [And] there’s more production coming on in the U.S.”
He pointed out that the health-care sector has been “downtrodden quite a bit.”
“A lot of biotech companies have been crushed by the correction, but they are really going to maintain a lot of growth,” O’Leary said.
“Moderna, for example, pretty good numbers … I’m invested there, as well as in Pfizer. There [are] places now that as the economy has changed, that look very, very promising for just generally sales and distributions back to shareholders,” he added.
“I think going into a more conservative mandate of large cap, dividend payers is not a bad outcome. It’s not a bad place to hide.”