Additionally, companies that are in a phase of rapid growth may need to raise further cash, either via debt or through the creation of new equity.
In a higher interest rate environment, the cost and capacity to raise such additional funds is constrained.
Lawrence Burns, co-manager of the Scottish Mortgage investment trust, says that while higher rates have had a negative impact based on investor sentiment, the underlying themes and trends in which the trust invests have not become less attractive, so he expects rate cuts to lead to a boost in investor sentiment for the sort of long-duration equities of which he is invested.
At the other end of the factor spectrum is Simon Adler, who jointly runs a number of global value equity funds at Schroders.
His approach is more focused on valuation than themes, and his thoughts are focused on two sectors right now.
Adler says that, "five years ago, when rates were low, consumer staple stocks were expensive, but higher rates pushed many of those from favour, particularly those with some debt".
One of the reasons consumer staple stocks fall from favour when rates rise is that cyclical businesses will benefit more than staple businesses if rates are rising as a result of stronger economic growth, while if rates are rising as a result solely of inflation being higher, one consequence is that bond yields rise, which negatively affects the attractiveness of the stable income derived from the consumer staple stocks.
Adler’s view is that the valuations of stocks in these areas presently represent value. He has the same view around bank stocks. That is an area of the market which benefitted from higher interest rates, but might suffer as rates fall.
Adler says: “While the returns achieved by banks have been exceptional in a world of rapidly rising rates – and those returns won’t continue if rates are cut – at the current level of valuation, bank stocks are attractive even in a scenario where they achieve just normal levels of return.”
Daniele Antonucci, chief investment officer at Quintet Private Bank, says he expects different equity markets to perform in radically different ways from each other, despite the potential for monetary policy to converge.
He says: “The global investment outlook is likewise far from symmetrical. In the Eurozone, the European Central Bank’s first interest rate cut since September 2019 is expected to prove supportive, with further cuts anticipated over the next six months.
