After the Federal Reserve cut US interest rates for the first time in four years last week with more trims planned, positive sentiment pulsed for various assets.
Investors are searching for clues about to how to adjust portfolios to match monetary policy easing by central banks around the world.
According to the Investor Knowledge Development Division of the Stock Exchange of Thailand (SET), interest rate cuts generally have a positive effect on stock investments because low interest rates stimulate borrowing and consumption, resulting in company growth and higher stock prices.
Investors often seek riskier investments for better returns during interest rate declines. Sectors that benefit from low interest rates include real estate investment trusts (REITs), luxury goods, technology, finance and utilities, all of which can record good growth and performance under this environment.
The Fed's rate cut was expected since Aug 23, when chairman Jerome Powell gave a speech at the central bank's annual conference that "the time has come" for interest rates to shrink.
"The direction it will take is clear. The timing and size of the interest rate cut will depend on the information the Fed receives in the future, including the trend of economic development and the balance of risks in various areas," he told the Jackson Hole Economic Symposium.
IMPACT ON BOURSES
In general, rate cuts are beneficial for various types of investments. Investors often adjust their portfolios seeking to cash in on declining rates.
When interest rates rise, stock prices tend to fall and bonds become more attractive. Conversely, when rates fall, stock prices tend to rise.
Interest rates have a direct impact on borrowing costs. When interest rates rise, companies have higher borrowing costs, which can lead to reduced investment or business expansion. This affects their growth, lowers cashflow and pressures stock prices to dip.
During this period, investors often shift to safer assets, such as government bonds, which may provide more attractive returns than riskier assets such as stocks.
When interest rates start to fall, companies may take the opportunity to borrow money for expansion as the cost declines, making repayment of both interest and principal easier.
Lower interest rates also promote consumer spending because people can access funding easier to buy big-ticket items such as houses and cars. Increases in business activity and consumption often result in higher stock prices.
Powell: The time has come for a reduction
LAG TIME
According to the SET, it usually takes about 6-12 months for a rate cut to yield economic growth, while the stock market tends to respond more quickly.
Investors tend to adjust their investment strategies according to their expectations about future interest rate changes.
In the past, the Fed often cut rates during an economic slowdown to stimulate financial activity.
"Lower rates are considered a catalyst for growth, making borrowing costs cheaper for consumers and businesses," said the SET.
"With consumer spending generally accounting for two-thirds of GDP, increased borrowing could lead to higher corporate profits, stronger economic growth and higher stock prices."
Beneficiaries
Businesses that benefit from lower interest rates are REITs, dividend-paying companies, and large firms with stable cash flows and strong balance sheets that can easily raise capital, have low debt-to-equity ratios, and future profit potential.
In addition, businesses that are volatile based on the economic cycle, such as luxury goods, technology, finance and utilities, tend to perform well when interest rates are lower because it reduces borrowing costs, which is beneficial for capital-intensive and growing companies.
During a downward trend in interest rates, REITs are favoured by investors because of their focus on rental income. Higher rents as interest rates dip means higher returns for investors in the form of dividends. Investors often receive no less than 90% of net profit in dividends, according to the SET.
Luxury goods companies tend to perform well during periods of falling interest rates because of reduced borrowing costs, making it easier for consumers to borrow money for expenses such as cars, electronics and travel. As a consequence, luxury goods businesses often outperform the overall market during these periods.
Technology businesses thrive in low-rate environments as capital costs are reduced, allowing growth-oriented companies to invest more in research, development and expansion, noted the SET. This gives these firms the opportunity to grow both their revenue and profits in the future.
The financial sector often performs well when rates are low, as lower rates stimulate lending activities, which can increase profits for banks and financial institutions. When borrowing is more attractive, demand for loans increases, resulting in higher interest income. Historically, financial stocks performed well during interest rate declines.
Note that stock valuations become more attractive when the price-earnings ratio decreases, attracting more investors, according to the bourse.
Utilities businesses perform well when economic growth slows or a rate cut is used to stimulate the economy. Utilities are considered an essential good and usually have stable, predictable income. Lower rates reduce costs for utilities, which often have high levels of debt in financing infrastructure projects, noted the SET. Financial stability and consistent demand make them an attractive business during times of economic uncertainty and low interest rates.
A man takes a photo of the trading board displaying share prices. REUTERS
ANALYST OUTLOOK
Bualuang Securities (BLS) said the market believes the Fed will cut rates by 75 basis points (bps) total this year, followed by another 1.25 bps in 2025.
This means a rate cut cycle is starting and investors should monitor central bank movements to prepare for stock market growth, said BLS.
The US and Vietnamese stock markets are predicted to gain the most, according to the brokerage.
According to historical statistics, if the Fed cuts rates for the first time during a soft landing, meaning GDP grows below average but inflation falls to the 2% target, the US stock market usually generates positive returns in the following 12 months.
On the other hand, if the Fed cuts rates but the economy is in recession, returns tend to be negative. The US economy this year shows signs of slowing growth in both the consumption and labour markets, but they are still at a controllable level and not worrisome, making a soft landing more likely, according to BLS.
BofA Global Research said there is a 78% probability technology stocks will generate a positive return one month after the first interest rate cut and an 89% probability luxury good stocks will do so.
"The Vietnamese stock market is often linked to currency factors, which is the case with the current Fed rate cut," said BofA. "There is a chance the dollar will weaken against the dong again as the Vietnamese economy is expected to grow well in 2025."
Thai investors can invest in US and Vietnamese stocks using the same accounts they use to buy Thai stocks through depositary receipts of US and Vietnamese stocks.
PICKING WINNERS
Asia Plus Securities (ASPS) said during this period it recommends focusing on five groups of local stocks set to benefit from lower rates in the future.
Hire-purchase group: Recommended stocks include Ratchthani Leasing (THANI), Muangthai Capital (MTC), Ngern Tid Lor (TIDLOR), Srisawad Corporation (SAWAD), Asia Sermkij Leasing (ASK), Aeon Thana Sinsap Thailand (AEONTS), Bangkok Commercial Asset Management (BAM), and JMT Network Services (JMT).
Small commercial banks: Recommended stocks include Kiatnakin Phatra Bank (KKP) and Tisco Financial Group (TISCO).
Real estate: The top picks are Supalai (SPALI), Land and Houses (LH), and AP Thailand (AP).
High-dividend or high-yield group: Recommended stocks are Intouch Holdings (INTUCH), Advanced Info Service (ADVANC), Siam Cement (SCC), Digital Telecommunication Infrastructure Fund (DIF), and CPN Retail Growth Leasehold REIT Unit (CPNREIT).
Beneficiaries from lower interest expenses: The top picks are B.Grimm Power (BGRIM), Gulf Energy Development (GULF), Minor International (MINT), CP ALL, and True Corporation (TRUE).
LOCAL DIAGNOSIS
As the new government talks with the Bank of Thailand about future monetary policy prospects, more consistency is expected between monetary and fiscal policies, said ASPS. The brokerage said there is a chance the central bank will cut the rate once this year by 25 bps. The next Monetary Policy Committee meeting is on Oct 16.
The baht is likely to appreciate against the dollar as the US is expected to lower rates faster than Thailand. Given fund flows into the Thai bourse and the offering of new Vayupak Fund units, the SET index is projected to rise 73-126 points to test 1,523-1,576 points, said ASPS.
