These were the days of March in which central banks should begin to lower interest rates, according to the expectations that the markets managed last October and that led to an upward rally in stocks and bonds. However, this week the ECB repeated the price of money at 4.5%, and the recent statements by the president of the Federal Reserve (Fed), Jerome Powell, suggest that this body is not willing to lower its levels of 5% either. .5% the next meeting on the 20th.
Now, this entity called the market expects official rates to begin to fall in June at the earliest. “Both headline and core inflation forecasts for 2024 and 2025 have been revised downwards, suggesting that the ECB is increasingly convinced that inflation is rapidly heading towards its 2% target. We expect the first rate cut to occur in June, once the government council has had in sight the wage data for the first quarter,” explains Felix Feather, economist at Abrdn, in line with the majority opinion of analysts.
Without a doubt, bonds are the asset that best reflects these changes in opinion on rate movements, since in stocks business results, corporate operations or growth expectations, lately related to technology, are intermingled. Taking the 10-year US bond as a reference – its yield hit a low of 3.8% at the beginning of last February and began to rise to reach 4.32% in just a couple of weeks – investors should wait longer to see rates fall. Also the intensity of the decline in a variable to take into account because in October there was great optimism about cuts of more than 2 points this year. Some expectations that have been moderated.
Real estate companies, renewable energy companies and construction companies have been penalized this year by markets that ran too much by betting on cuts in March or April
This delay in the decision of the central banks has also had consequences on the stock markets in a very good start to the year where the United States, Japan and Germany have reached historic levels in their indicators. A panoramic view shows that the long-awaited rate cut, which will make financing for listed companies cheaper and improve valuations, has not had the expected negative effect in markets highly focused on boosting technology companies. Axel Botte, head of market strategy at Ostrum AM, points out that “risk assets have proven resistant to the revision of the path of official interest rates. This stellar performance of equities in 2024 continues to be explained by the rise of American technology stocks: the trend of stocks is bullish, and cautions are dissipating after the publication of Nvidia's good results,” he concludes.
But a more detailed reading finds those benefited and harmed by the delay of the monetary policy leaders. The small and medium-sized securities on the Spanish Stock Market have done worse than the group of large ones, the Ibex 35, which is positive for the year, while the Ibex Small Cap is down 1.5% and the Medium Cap registers a decline of 4.10%. Smaller companies always have a higher financial cost and greater difficulties in refinancing their debts, so higher rates hurt them more. In this context, analysts who were betting on a rapid and brilliant recovery of the most modest companies on the stock markets have made a mistake. Going into specific values, the sectors of renewable, real estate and construction companies have been harmed by this rate situation. Inmobiliaria Colonial drops more than 22%, Merlin Properties drops 10% and Metrovacesa drops 7% so far this year. In renewables, Solaria gives up 38%, Grenergy leaves 28% and Soltec, 27%. ACS, OHLA, Sacyr, FCC and Acciona are negative for the year, while Ferrovial and Grupo San José are saved.
Banking, benefited
On the opposite side, banks are the beneficiaries of an environment of higher rates for a longer period of time, which allows them to further improve their financial margins. All entities are positive for the year: Caixabank (16.4%), BBVA (15.3%), Sabadell (14.1%), Unicaja (9.27%), Bankinter (5%) and Santander ( 2.25%).
An overview of the market suggests that the current moment could be good for both large quality stocks and those more sensitive to rates. Andrew Heiskell, equity strategist at Wellington Management, indicates that “the most attractive potential investments are concentrated at two extremes: on one of them are quality companies that reinvest their capital to continue growing and, on the other, the sectors and regions with greater discounts and more sensitive to the macro environment and interest rates,” he comments.
All banks are trading positively due to high rates and the increases in CaixaBank and BBVA stand out
Without a doubt, money has rewarded and punished according to its rate expectations. “The delay is temporary, not structural, and there will be more volatility that will represent a buying opportunity in some companies,” explains Miguel Macho, investment director of CA Indosuez Wealth Management. And he adds: “We like growth companies linked to artificial intelligence (AI), listed industrial companies with high debt and, with respect to banks, we are not in favor of making profits even if they stop improving margins, due to their stability. and high dividends. Renewables and Socimis have also become attractive and represent an entry opportunity,” he concludes.
XTB analyst Joaquín Robles highlights that the banking sector is the most benefited by the adjustment in expectations of cuts, since this delay means maintaining high interest margins, which is its main source of income. “The other group of companies that are performing well under this environment are large capitalization companies, such as American technology companies, because they are demonstrating their ability to continue increasing their profits despite high rates,” he explains. Regarding recommendations, he indicates that “investors looking for a higher yield should look at the most penalized securities. There are sectors that are heavily penalized by this environment, but that could offer greater potential in the coming months, such as construction, renewable energies and real estate.”
Analysts assume lower rates this year and the most punished are a clear opportunity
Some analysts are more skeptical about the expected benefits of a rate drop on stocks. This is the case of Pedro del Pozo, director of financial investments at Mutualidad, since in his opinion, “some prudence in variable income, in the short term, does not hurt. And not only because of the current technical overbought, but because a more favorable rate context does not presuppose good performance, at least automatically. This will depend in any case on how growth evolves and with it, business profits,” he concludes.
Antonio Aspas, partner of the Buy & Hold management company, downplays interest rate movements when creating his fund portfolio and gives a current example. “We would not buy Grifols because rates drop and its debt is lightened. “We look for solid, well-managed, high-quality companies, with a typical investment horizon of four or five years, although in our funds there are many securities that have been in the portfolio for more than ten years,” he explains. Of course, he is confident that rates will end up lowering “because barring a scare in the evolution of oil prices, inflation will continue to reduce in a world in which prices are comparable and goods can be purchased in any country,” he says. .
This week, greater clarity has already been seen in the bond market in the sentiment of an upcoming reduction in the price of money that has been reflected in bonds. In the case of the United States, it is around 4% in its 10-year reference (4.2% the previous Friday). In the Spanish reference, the drop in profitability has also been 20 basis points from 3.31% to the current 3.10%.
In some very punished stocks there is not as much visibility, but there have been some timid rebounds. With this volatility it can be easy to miss the expected improvement, always linked to erratic market sentiment.
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