Barclays Unveils "Rate-Cut Winners" as Central Banks Prepare to Ease Policy
As central banks in Europe and the UK prepare to shift gears with interest rate cuts, Barclays has identified a basket of global stocks poised to benefit from this shift in monetary policy. With the European Central Bank (ECB) and the Bank of England (BoE) expected to continue or initiate rate reductions in the second half of this year, extending into 2025, the investment bank has outlined a list of companies primed for growth in this new environment.
Key Takeaways:
- Barclays sees potential benefits for specific stocks as central banks ease monetary policy.
- The bank’s "rate-cut winners" basket includes companies in sectors expected to thrive in a lower-interest-rate environment.
- While banks are often viewed as vulnerable to lower interest rates, Barclays argues that increased lending and reduced loan provisions could partially offset potential earnings losses.
- The real estate sector stands out as potentially vulnerable to rising interest costs.
A Shift in Monetary Policy
The anticipated rate cuts come as financial markets brace for a change in the global economic landscape. While inflation has begun to moderate in key markets, ongoing pressures and geopolitical uncertainties continue to influence central bank decisions. The ECB’s key rate is projected to reach 2.5% by mid-2025, while the BoE’s rate might settle at 4%, according to Barclays economists. These forecasts suggest a path of gradual easing, allowing for a measured response to the evolving economic environment.
Barclays’ "Rate-Cut Winners" Basket
Barclays has identified several companies that they believe will benefit from a lower interest rate environment. Their "rate-cut winners" basket includes a diverse range of businesses, highlighting the different ways in which the economic landscape could be reshaped by central bank actions.
Here are some of the notable companies included in the basket:
- Cellnex Telecom: This Spanish telecommunications infrastructure company benefits from reduced borrowing costs, potentially leading to expansion and investment. Lower interest rates make it more affordable for Cellnex to secure debt financing for new infrastructure projects, contributing to growth and market share.
- Royal KPN: This Dutch telecom giant, much like Cellnex, could also see a boost from lower borrowing costs. This can translate into increased investments in network infrastructure, enhancing services and competitiveness in the telecommunications market.
- Hermes: This French luxury goods conglomerate stands to benefit from increased consumer spending driven by lower borrowing costs and greater disposable income. With more people able to afford luxury items, Hermes is well-positioned for growth in a lower interest rate environment.
- Zalando: This German online fashion retailer enjoys advantages from lower rates through stronger consumer demand and potentially reduced costs for its logistics operations. A lower interest rate environment could fuel increased online shopping activity, benefitting Zalando’s already robust e-commerce presence.
- Siemens Healthineers: This German medical technology company could see growth as healthcare investments become more affordable due to lower interest rates. A more favorable borrowing environment could incentivize hospitals and medical facilities to invest in new equipment and technology, leading to higher demand for Siemens Healthineers’ products and services.
A Complex Relationship: Banks and Lower Rates
While lower interest rates typically put pressure on bank profitability, Barclays argues that this effect may be mitigated for some banks. The bank contends that increased lending volumes and reduced provisions for bad loans could offset a portion of the potential earnings losses. "While bank profitability is no doubt linked to rates, we note that their [earnings per share] never saw the full benefit of higher rates this cycle (less leverage and less risky business), meaning their earnings beta to a shallow cutting cycle should be lower than expected," stated Barclays strategists led by Matthew Joyce in a note to clients on July 24.
This suggests that banks with strong credit quality and a healthy lending portfolio might be better equipped to navigate a lower interest rate environment. The bank’s analysis suggests that the relationship between bank profitability and interest rates is not always straightforward, with other factors, such as lending activity and risk management, playing significant roles.
The Real Estate Sector: Potential Vulnerabilities
In contrast to the potential benefits for some sectors, Barclays highlights the real estate sector as a potential area of concern. The bank forecasts that interest costs as a percentage of sales for real estate companies could rise from about 14% to 21.5% by the end of 2026. This increase in borrowing costs could put pressure on profitability, particularly for companies with significant debt burdens. As interest rates climb, the cost of servicing debt becomes a more significant component of operating expenses, making it challenging for real estate companies to generate returns and sustain growth.
This potential vulnerability underscores the importance of carefully evaluating investment choices in a shifting economic environment. Barclays’ analysis emphasizes the fact that the impact of interest rate changes is not uniform across all industries, and certain sectors may experience significant challenges as borrowing costs rise.
Navigating a Changing Landscape
Barclays’ "rate-cut winners" basket provides a valuable starting point for investors seeking opportunities in the evolving economic landscape. By identifying companies poised to benefit from easing monetary policy, the bank offers insights into how different sectors might respond to the changing interest rate environment. However, it is crucial to remember that market conditions are constantly evolving, and investors should conduct thorough due diligence before making any investment decisions.
The complexities of the global economic landscape and its interplay with monetary policy decisions highlight the importance of a nuanced and data-driven approach to investment strategies. By understanding the potential implications of interest rate changes for different sectors and companies, investors can make informed choices that align with their risk tolerance and investment goals.
