Calculations from capital market analysts: These stocks are likely to benefit the most from falling interest rates

• Historically best sector when interest rates are low: consumer goods stocks
• Commodity stocks, on the other hand, were a bad idea
• Tech stocks: Weak at first glance, but solid at second glance

Stock market experts around the world are confident that the first interest rate cuts will begin soon. Although the US inflation data for January was slightly higher than expected, the general trend of declining inflation pressure has been confirmed again and again in recent months.

The US Federal Reserve (Fed) is likely to be the first by summer at the latest Interest rate cut According to common expert opinion, the European Central Bank (ECB), the Bank of England and the Swiss National Bank (SNB) are likely to follow more or less quickly. A good two years after the interest rate turnaround was initiated in spring 2022, times will change for investors – good preparation is certainly helpful.

This is how Dörr calculates performance

For this purpose, Sebastian Dörr, capital market analyst at HQ Trust, used historical data. Dörr examined how stocks from 20 different sectors performed in the 13 interest rate reduction phases since the end of 1984. In his analysis, quoted from “Institutional Money”, the analyst calculated the relative returns of the respective global sector indices compared to the global Datastream (DS) stock index.

Coca-Cola, Procter Gamble & Co. were a good idea

Dörr’s results are quite surprising. According to his calculations, two consumer goods sectors performed best: food, beverage and tobacco in first place; This is followed directly by stocks from the personal care, drugstore and grocery stores sectors. This is surprising given that the consumer goods sector is seen as a safe haven, particularly in turbulent times, while it is usually seen as less attractive in risk-on phases such as periods of interest rate cuts.

According to Dörr’s analysis, this doctrine should be treated with great caution; in fact, the consumer goods sector was the only stock category that outperformed the broad overall market in all 13 interest rate reduction phases without exception. Furthermore, the industry did not have a negative return in any of the 13 cases. It was therefore worthwhile for investors to have consumer securities that are considered particularly stable, such as Coca-Cola, PepsiCo, Procter Gamble, British American Tobacco (BAT) or McDonald’s, in their portfolios during times of interest rate cuts.

The healthcare sector also performed well

The second best sector behind consumer stocks is the healthcare sector, which outperformed the market in 12 out of 13 cases. In addition: According to Dörr’s calculations, healthcare companies achieved the best performance over the entire period since 1984. Johnson & Johnson, Novartis, Eli Lilly & Co. only posted negative performance once – in 2010 – when interest rates were cut.

Dörr: These stocks could perform poorly in the near future

At the other end of the list is a stock category that was particularly popular with investors after the start of the Ukraine war in February 2022 due to sharply rising prices: “At the bottom of the table are the raw materials and energy sectors: stocks from these two sectors remained on average lagged the market in eleven or ten out of 13 periods.” Things went downhill particularly sharply for Shell, Barrick Gold & Co. in the years 1988, 1997/98 and 2011: In these phases, losses amounted to more than 20 percent.

How did the technology sector perform?

It is a truism in investor circles that technology stocks benefit particularly strongly from low interest rates. This reduces the cost of loans, which can usually represent a major cost item for growth-oriented companies. In addition, when interest rates are lower, the future profits of growth stocks using the discounted cash flow method are more attractive because the risk-free return is correspondingly lower.

In practice, however, the view that technology stocks are the best investment class when interest rates are falling does not always seem to be true. In eight of the 13 cases, technology stocks lag behind the overall market. On average, the underperformance is 6.3 percent – putting the technology sector in second to last place.

Dörr has an explanation for this result, which at first glance seems astonishing: “However, this observation is strongly influenced by the high losses after the tech bubble burst. Over the entire period, technology is in second place in terms of performance. This also applies to the most recent phase falling interest rates. Of the 19 other sectors, only utilities performed better.” In two interest rate reduction phases, namely 2000/2001 and 2002, technology stocks lost 42.4 percent and 48.6 percent respectively, which really spoiled the average. In the last case (2018-2020), however, technology shares rose by 18.4 percent, which was the second best value at the time.

The calculations should therefore be treated with a certain degree of caution

When it comes to the statistics, however, it should be taken into account that Dörr only refers to the specific period of interest rate reductions. In reality, investors reposition their portfolio in advance of interest rate cuts. The rapid rise in tech stocks since the beginning of 2023, which, in addition to the AI ​​boom, is also related to interest rate cut fantasies, would therefore not appear in Dörr’s statistics for the next case. In fact, some experts believe that value stocks have high catch-up potential and could catch up during the interest rate reduction phase.

Editorial team finanzen.net

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