The ECB has started the process of lowering rates, fueling stock exchange expectations for a soft landing. Which ETFs make sense to follow in this new economic and monetary scenario?
The latest meeting of the European Central Bank (ECB) marked the start of a process of lowering interest rates, a move expected by many investors. In this context, interesting opportunities emerge in different sectors of the European financial market.
Here are three ETFs to watch, which could benefit from the ECB’s current monetary policy. At the same time, these ETFs are also the most dangerous to hold in your portfolio in the event of new economic contractions. But does it make sense to expect a deterioration of the European economic context?
European Bonds: iShares Euro Investment Grade Corporate Bond ETF (IEAC)
Reductions in interest rates tend to positively influence the bond market, making investments in bonds, especially investment-grade ones, more attractive. An interesting ETF in this sector is the iShares Euro Investment Grade Corporate Bond ETF (IEAC). This ETF tracks the Markit iBoxx Euro Liquid Corporates index, which includes high-quality corporate bonds issued in euros. Historically, it has held up well during periods of lower rates, thanks to the greater stability of investment-grade companies. It must also be said that at the moment, the yield differential (spread) between investment grade and high-yield bonds is very low. This suggests that high-yield bonds have already priced in lower financing costs, while investment-grade bonds may offer a higher risk premium.
Real Estate iShares European Property Yield UCITS ETF (IPRP)
The European real estate sector, mainly represented by REITs (Real Estate Investment Trusts), could benefit significantly from the reduction in financing rates. REITs raise capital from investors and invest it in real estate, then distribute the profits from rentals and sales. The reduction in rates can encourage a revival of real estate negotiations and greater valorization of real estate trusts. A relevant ETF in this context is the iShares European Property Yield UCITS ETF (IPRP). This ETF invests in European real estate companies that generate rental income, focusing on commercial and residential properties. It should be noted that the REIT sector tends to perform well in low-interest-rate environments, as lower financing costs improve the profitability and ability of real estate companies to expand.
European Small Cap: SPDR MSCI Europe Small Cap UCITS ETF (SMEA)
European small caps have been among the hardest hit by the recent spike in interest rates, which has squeezed profit margins and reduced access to financing. However, lowering rates could reverse this trend. An interesting ETF in this sector is the SPDR MSCI Europe Small Cap UCITS ETF (SMEA). This ETF tracks the MSCI Europe Small Cap index, which includes European small and medium-sized companies. Small caps tend to benefit significantly from lower interest rates, as falling financing costs can spur growth and improve profit margins. In a soft landing scenario, where the economy gradually slows without entering a recession, small caps could see a significant inflow of capital, improving their overall performance.
Could a recession come to Europe?
When inflation falls rapidly, as is happening in Europe, it can be a sign of weakening aggregate demand, implying slower economic growth or even a recession. To avoid a deflationary spiral and stimulate the economy, the ECB intervenes by lowering interest rates. This instrument is aimed at reducing financing costs for businesses and consumers, encouraging spending and investments.
The lowering of interest rates by the European Central Bank (ECB) is a monetary policy measure adopted in response to various economic factors. This decision was taken not only to bring inflation back to the ECB’s target but often in contexts of excessive economic contraction. The recent decision to lower rates is also linked to the rapid approach of inflation to the central bank’s target, which may have raised concerns about the stability of the European economy.
Rate cuts in Europe occurred during periods of significant economic contraction. For example, during the financial crisis of 2008-2009 and the European sovereign debt crisis of 2011-2012, the ECB reduced rates to support the economy and stabilize financial markets.
What to expect from ETFs in the event of a recession?
It is important to underline that reducing rates alone is not enough to guarantee a surge in the performance of the listed ETFs. All the assets listed are closely linked to the European economic trend. If the lower rates were to be accompanied by a significant economic contraction, this could have negative effects on the performance of bonds, REITs, and small caps. In particular, a significant economic contraction would undermine companies’ business, making the reduction of financing costs ineffective in the short term and depressing the prices of the most sensitive securities.
Therefore, while the current landscape offers attractive opportunities, investors must remain vigilant and carefully consider broader macroeconomic conditions before making investment decisions.
Original article published on Money.it Italy 2024-06-16 17:55:00. Original title: 3 ETF da seguire con l’abbassamento dei tassi BCE
