As interest rates decline, European stocks in the financials, consumer discretionary, and industrials sectors often see significant gains. These sectors reap the benefits of lower borrowing costs, which lead to increased consumer spending and growth in capital investments—ultimately driving market expansion.
Historically, particular European stocks and sectors have thrived during periods of interest rate reductions, especially when central banks implement measures to ease monetary policy without an accompanying recession.
These economic cycles, characterized by a need to stimulate growth while controlling inflation, have proven favorable for equities, particularly those sectors that are sensitive to lower borrowing costs.
On a global scale, central banks, with the Federal Reserve at the forefront, are recalibrating monetary policies to tackle inflation and foster growth, and Europe is no exception to this trend.
As the European Central Bank (ECB) initiates a new round of rate cuts, investors are keenly observing which sectors and stocks are likely to benefit. In September, the ECB lowered rates by 0.25 percentage points to 3.5%, with another cut expected at the upcoming October meeting as inflation slipped below the 2% target and economic momentum decelerated.
Which European sectors and companies have historically yielded superior returns during periods of interest rate cuts, and how have these stocks fared recently?
Effects of Rate Cuts on Financial Markets
Interest rate cuts impact both the real economy and financial markets. By lowering borrowing costs, central banks aim to stimulate spending and investment by individuals and businesses. In the realm of financial markets, rate cuts typically bolster sectors most affected by changes in credit conditions.
Historical evidence suggests that European stocks generally exhibit heightened performance during non-recessionary rate-cut cycles, as demonstrated by outcomes from the previous month.
Analysis shows that European equities perform optimally during non-recessionary phases, often showing substantial gains three to six months post the initial rate cut. Conversely, market reactions in recessionary contexts tend to be more muted and erratic.
Following the Federal Reserve’s initial rate cuts, the Euro Stoxx 50 index exhibited measurable performance improvements, signaling a promising trend.
Analysts agree that the current cycle of rate cuts is better positioned for economic growth, making it more advantageous for equities. “We are entering a more optimistic phase of the economic cycle, characterized by sustained growth alongside reduced policy rates—this combination has historically been beneficial for equities,” remarked Peter Oppenheimer, an analyst at Goldman Sachs.
Top European Stocks in Non-Recessionary Rate Cuts
Certain European companies tend to outperform in cycles of interest rate cuts, especially when these cuts do not coincide with a recession in the U.S.
According to historical data from Bank of America, several companies within the Euro STOXX 600 index have a track record of outperforming the market following the first Federal Reserve rate cut:
Sectors Capitalizing on Rate Cuts
Over the past month, the European sectors that have excelled include materials, financials, property, and consumer discretionary.
These cyclical sectors are particularly receptive to lower interest rates, as they closely follow changes in economic activity and credit availability.
Analysts at Goldman Sachs observed, “Interest rate reductions have bolstered higher-leverage segments of the market this month, with real estate standing out as one of the leading sectors.”
The following European stocks have delivered remarkable returns over the last month, reflecting optimism in the wake of the ECB’s rate adjustments:
Top 10 Performing European Stocks Over the Last Month:
- Compagnie du Cambodge (France, Industrials): +31.08%
- Delivery Hero SE (Germany, Consumer Discretionary): +30.93%
- Zalando SE (Germany, Consumer Discretionary): +29.60%
- Unipol Gruppo S.p.A. (Italy, Financials): +25.83%
- Prosus N.V. (Netherlands, Consumer Discretionary): +19.78%
- BPER Banca SpA (Italy, Financials): +19.67%
- Siemens Energy AG (Germany, Industrials): +18.69%
- Telefonaktiebolaget LM Ericsson (Sweden, Information Technology): +16.36%
- Daimler Truck Holding AG (Germany, Industrials): +15.71%
- Fresnillo pic (United Kingdom, Materials): +15.23%
Conclusion
As the European Central Bank continues its cycle of easing, historical trends suggest that specific sectors and stocks will benefit greatly, particularly those sensitive to shifts in borrowing costs.
Cyclical sectors have consistently thrived during non-recessionary environments characterized by rate cuts, as reduced interest rates typically boost consumer spending and investment.
It is essential to note, however, that past performance is not a guarantee of future results. Financial conditions can shift rapidly, and the onset of an economic recession has the potential to dramatically alter market sentiment.
Photo credit & article inspired by: Euronews
