Market Musings 161223: Winners From Lower Rates

16th Dec '23 by Edmund Shing

14 comments 2112 reads

Market Musings 161223: Winners from Lower Rates

Some relief for borrowers, at last

Summary

Long term interest rates fall hard
Who benefits from lower interest rates? Real Estate, Housebuilders
Utilities too

Podcast this week:

Outlook 2024: Why we stay positive on Stocks and Corporate Credit

In this podcast, Edmund Shing, Global Chief Investment Officer of BNP Paribas Wealth Management gives his outlook for 2024.

• How far can inflation fall?

• Lock in attractive bond and credit yields

• Identify attractive regional stock markets

• Are illiquid assets a good card to play?

Long term interest rates fall hard

Since peaking in mid-October in the US and France, and in mid-August in the UK, long-term interest rates in the form of 10-year government bond yields (the fixed rate investors receive for lending money to the government for 10 years) has fallen from peak by 1%, to 4% in the US, to 3.7% in the UK and to 2.6% in France.

Long-term interest rates (10-year government bond yields) fall 1%

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Source: tradingview.com

This drop represents a sharp reversal of the upwards march in long-term interest rates in place since late 2021, when the UK 10-year gilt (government bond) yield rose from 0.7% to as high as 4.75% at peak.

Long-term interest rates are following, in a lagged fashion, the path of inflation which rose to peak at the end of 2022, and which has since fallen sharply to 2.4% in the Eurozone as of November.

Eurozone inflation drops from over 9% to 2.4% in November

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Source: tradingeconomics.com

It seems likely that inflation rates will continue to ease lower in Europe, the UK and the US in the months ahead, judging by the underlying disinflationary trends in key inflation components such as rents, Chinese export goods prices, energy prices and even food prices.

With inflation rates now approaching the official 2% target of major central banks, interest rate markets have now begun to anticipate interest rate cuts from early 2024 by the US Federal Reserve, the European Central Bank, and the Bank of England.

This anticipation of…

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Nursemaid

16th Dec '23

Thanks Edmund, I always your commentaries.

Nothingventured

A few months a go I created a 'sub portfolio" of house builders, estate agents, mortgage brokers, building suppliers etc and it's working well so far!

Lucky dip

17th Dec '23

Very good article Edmund. What you wrote reminds us all that at the end of the day it is macro events driving the sectors up and down not what the companies do. I hardly read the details of the company accounts because if you are in the wrong sectors at the time , very little the chief can do to change their fortunes.

I shouted out in this site when Taylor Wimpey was under £1 and Persimmon under £10.

It was fear ( sentiment) which was driving the prices down rather than facts.

One sector Edmund has missed are the financials, Banks and asset managements which I think will do well next year.

Let's hope so!

BnB

I did similar, possibly a little earlier with a couple of the names below to no extra advantage. I like building suppliers most because there is an element of intellectual property and good returns on capital for the higher quality names, then housebuilders whose moat is their banks of land, but I eschew the obvious value in estate agents and the like as I see little in the way of moats.

Geberit AG (SWX:GEBN)
Kingspan (ISE:KRX)
Genuit (LON:GEN)
Advanced Drainage Systems (NYQ:WMS)
Volution (LON:FAN)
Howden Joinery (LON:HWDN)
Brickability (LON:BRCK)
Headlam (LON:HEAD)
Luceco (LON:LUCE)

Plenty to choose from amongst housebuilders, but I like MJ GLEESON (LON:GLE)

mortimer

a good read for new young investors when the next meltdown comes be prepared for all builders and suppliers to be booted first wait until they are bobbing along on the floor i buy 3builders 3 suppliers without any fear because when its over they come back like a steam train with wagons on back full of divis idid it in 2008 and beginning of this year

Rusty2

Don't banks benefit from high interest rates? On current accounts they don't oay anything or very little, yet rake in at high rates on loans. Was some talk about a windfall tax on banks but that was a whike ago.

ACounsell

Hi Edmund,

Your podcast in particular is offers a very optimistic outlook. There are some very contrarian views out there. A summary on the Money Makers website https://money-makers.co/catego...of an interview with Felix Zulauf, apparently a well respected Swiss investor, by a Wall Street commentator (Steve Blumenthal) offers a very doomsday scenario. His main points were

He believes we are in a totally different macro environment than anything we’ve seen in the last 40 years. Investors face a rollercoaster ride in the equity and fixed-income markets for the rest of the decade—very big ups, very big downs, up again and down again.
Short term he is bullish on equities into the first quarter of 2024. He sees a potential end to the current uptrend in January or possibly March. He believes interest rates (the 10-year Treasury yield) peaked at 5%. He believes they’ll go down to 3.70%, and possibly 2.75%, before bottoming and then rising again.
This is due to a slowing economy/recession. A recession is likely in the second half of 2024 or sooner. Looking back at previous recessions, there is always talk of a “soft” landing, he notes, but in the last 50years there has been only one (in 1994). When everyone is in agreement, as they seem to be when it comes to a soft landing, something else is always what happens.
The period ahead is likely to be inflationary, not deflationary despite the deflationary forces of rising debt and demographics. More liquidity from the Federal Reserve and Congress will lead to a second wave of inflation that will be higher than the first—think 13% to 15%. Imagine what that means to the level of interest rates!
Ultimately “the bond vigilantes” will force the system to break and governments to restructure debt and entitlement programs. A crisis is needed for it to happen. We are also in a war cycle. Wars are inflationary, involving protectionism, disruptions and changes in supply chains. They are likely to trump the deflationary forces of debt and demographics.
A “grand daddy bear market” (meaning down around 80%) is coming in the next five years or so. In a grand daddy bear market, asset prices will fall sharply. You want to own good companies that will recover after the meltdown. He suggests investors learn how to time trends in the market.
In the what-to-own category, Felix generally likes hard assets, such as gold, oil, and real estate. He likes certain value-oriented stocks, noting that value plays, like high and growing dividend stocks, are starting to behave better. It is best to avoid general index funds. The market has never been more concentrated on just a few names than it is today. They’ll correct more than the value stocks, which have been unpopular and under-owned.

A some what different perspective!!

sevenccc

BnB thanks for putting a list of companies up for consideration. I always find that helpful as it provides something tangible.

My preferences for building ancillaries extend to include Eurocell (LON:ECEL), Tyman (LON:TYMN) , Epwin (LON:EPWN) and more directly involved Michelmersh Brick Holdings (LON:MBH). Mostly paying decent divis while we wait and starting to move up in anticipation of lower rates/ recovery of build rates. I suspect we might have to wait another 12 months or post any snap election for any real prospect in build numbers really starting to head up but the market is already on the case.

I like Epwin and Eurocell’s fundamentals but I hate their products! Off limits for me. But I understand the appeal as stocks. I expect good money will be made on them

ken mitchell

ACounsell.

His guesses might or might not prove correct. Just as the guesses from a bullish commentator might or might not prove correct.

It’s the same when supposed “experts” guess where markets are heading. They don’t know and neither do we. And when their market guesses got wide coverage they were wrong time and time again, and now there are far fewer such “expert” guesses.

So is it better instead to focus on what we DO know,instead of what we don’t?

e.g like many UK shares being at bargain basement levels and the UK Market being around the lowest it has ever been compared with other major Markets? And Investment Trusts being at unusually big discounts and Trusts that usually trade at a premium going to discounts too.

My investment performance improved dramatically once I focused on things like that and whether or not a lot bad news was already priced in (or good news well and truly priced in with that share overvalued) instead of forecasts from supposed experts who so often got it wrong.

littledavesab

It's reasonably easy to make a persuasive (and seemingly intellectual) bear case on the facts that the Western world is a bunch of Empires built on debt etc. Mr Zulauf was quite intellectually bearish when I last watched something of his around 12/5 years ago!

But stock markets have a knack of climbing a wall of worry. Personally it feels like the giant cogs are spinning in a positive direction....for now!

Ken Mitchell

Agree with your view of macro forecasting and I hope your view on Investment Trusts turns out to be accurate! I hold rather too many sitting a huge discounts though I don’t intend to sell . Anyway when I sell anything these days it promptly goes back up - Albemarle (NYQ:ALB) being the latest example despite a 60%+ fall from peak in last year and a crash in Lithium prices.

18th Dec '23

It’s the Investment Trusts at undeserved big or much bigger than usual discounts that I invest in and not those where the discount is merited either because that sector (e.g some renewable energy Trusts) had perhaps been overhyped, or because of lousy performance.

As for those “expert” commentators/forecasters. Is there also a danger if factoring their opinions into our investment decisions, of buying near peaks and selling near the lows? So many investors buy near the top when money pours in to Investment Funds and then sell at a loss and money flows out of those Investment Funds. And they do the same with their share buying and Fund buying. i.e doing what nearly always doesn’t work instead of what nearly always does work!

Also worth mentioning that Fund Manager shares reflect this. They do very well in bull markets when money is flowing in to their Funds and badly in bear markets when £millions and even £ billions flow out of them.

I hold Polar Capital Holdings (LON:POLR) Liontrust Asset Management (LON:LIO) Premier Miton (LON:PMI) Abrdn (LON:ABDN) and Jupiter Fund Management (LON:JUP) because they fell for above reason and high chance they will outperform IFIF 2024 turns out to be a decent year for investors, And there’s a chance of bids or mergers, and some pay big dividends to provide useful income if we have to wait a while for the share prices to perk up.

Epitychia

Doom forecasts are more exciting that boom forecasts. So there is a bias towards having more of the former than the latter. However, i agree with with Ken Mitchell that both are very close to being entirely guesswork.

Market Musings 161223: Winners from Lower Rates