ECB to cut rates: winners and losers in new era

The European Central Bank (ECB) is expected to begin cutting eurozone interest rates from historic highs this week, representing a clear divergence from the US Federal Reserve and the Bank of England, meaning investors might need to consider rebalancing their investment mix as the landscape shifts.

Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory and asset management organisations, says a strategic approach that mitigates risks while capitalising on emerging opportunities is required as the ECB moves out of step with its major central bank peers.

He comments: “It’s almost certain the ECB will cut rates on Thursday, after keeping them steady since last October, following 10 consecutive rises. 

“The move has been widely flagged as economists raise concerns about a divergence from the US Federal Reserve and the Bank of England, among other central banks.

“However, sticky inflation means the ECB’s decision is unlikely to begin a rapid easing cycle.”

Investors eager to protect and grow their wealth “in this new era will be mulling several key considerations. 

“Longer-duration bonds are more sensitive to interest rate changes, meaning investors will be perhaps shortening the duration of bond portfolios to mitigate the impact of rate cuts.

“As traditional bond yields decrease, high-yield bonds or ‘junk bonds’ are likely to offer better returns. However, these come with higher risk, so a thorough credit risk assessment is crucial.

“It can be expected that they will also be looking beyond eurozone bonds. Emerging markets or US bonds might offer better yields and help balance the portfolio.”

He continues: “Lower interest rates typically benefit growth stocks, particularly in tech and innovation sectors, due to cheaper borrowing costs.

“High-dividend-yielding stocks become more attractive as fixed-income yields decline. Investors will be considering adding solid, dividend-paying companies to their portfolios.

“Certain sectors, such as real estate and utilities, tend to perform well in lower-interest environments, so we expect some to rebalance their portfolios to increase exposure to these sectors.”

Despite the anticipated rate cuts, persistent inflation remains a concern. 

​“Eurozone data has been surprisingly robust in recent times, and the markets are dialling back expectations for the number of ECB rate cuts this year. Our base case remains for cuts in June, September and December.”

​“This means that investors will still be protecting against inflation through commodities and real assets and by seeking equities with pricing power – companies that can pass increased costs onto consumers without losing business, typically in essential services or consumer staples, which are good investments in such periods.”

Interest rate changes are likely to significantly impact currency values.​

“The ECB could be putting the euro on a weaker trajectory on Thursday,” notes Nigel Green.

“Investors are likely to be eyeing hedging strategies such as forward contracts, options, or currency ETFs to protect against adverse currency movements. Investing in assets denominated in stronger currencies, like the US dollar, can also provide a buffer against a declining euro.”

With the US Federal Reserve diverging by delaying rate cuts, investments in US assets are going to become more attractive. 

“As ever, diversifying investments across different geographies to mitigate risks associated with region-specific economic policies and conditions is critical.”

Given the complexity of the current economic environment, consulting with financial advisors can provide valuable insights and personalised strategies to navigate these changes effectively.

The deVere CEO concludes: “ECB rate cuts create both risks and opportunities – it’s a pivotal moment for investors.”


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