If Interest Rates Rise, There's One Place For Investors To Hide

• The possibility of an imminent Fed rate hike has utility investors looking for defensive trading strategies.
• A.B. Bernstein believes that U.S.10-year Treasury rates will not climb as steeply as the market expects over the next year.
• The firm believes that certain utility stock earnings will outperform U.S. GDP growth in 2016.

Almost everyone on Wall Street is now expecting the Federal Reserve to begin its next tightening cycle sometime in the next few months. For investors worried about the type of impact that rising rates could have on their portfolios, A new report by A.B. Bernstein analyst Hugh Wynne addresses those concerns and discusses the how utility stocks will be affected.

Where are rates headed?
According to Wynne, consensus forecasts for U.S. Treasury rates over the next year are calling for a 0.75 percent rate increase. However, Bernstein is skeptical that treasuries will make that strong of a move.

3 defensive strategies
Wynne recommends three defensive utility stock trading strategies headed into 2016.

First, he notes that mid and small-cap regulated utilities have historically outperformed larger peers during prolonged periods of rising bond yields.

Second, he adds that high dividend yielders have also outperformed other utilities during spikes in 10-year Treasury yields 69 percent of the time by an average of 2.3 percent. Stocks with both strong dividend yield and dividend growth have historically performed even better.

Finally, certain utilities with regulatory restrictions on return on equity (ROE) could see a boost if earnings restrictions are soon adjusted to reflect rising long-term Treasury rates.

Top picks
Bernstein predicts that the environment for utilities in 2016 could provide an opportunity for many companies to generate earnings growth exceeding the national GDP growth rate. The firm’s top utility stock picks include Outperform-rated Duke Energy Corp DUK, Edison International EIX and PG&E Corporation PCG.

Disclosure: the author holds no position in the stocks mentioned.