BTG Pactual conducted a survey and found that, historically, this group of international stocks soared after the start of the interest rate cut cycle in the US
This Wednesday (18) could be decisive for global markets. Today, the Fed (Federal Reserve)the United States Central Bank, will decide the direction of the Fed Funds Ratewhich is the base interest rate of the country.
The expectation is that the Fed will finally initiate a interest rate cut cycle there. Which can generate positive impacts for the American economy, as well as for risk assets.
In this scenario, analysts at BTG Pactual point out that the US Central Bank's decision could serve as “kitten” for a group of actions.
US interest rate cuts have moved from 'when' to 'how'
Markets have been waiting for the start of monetary easing in the United States for some time now. At the end of 2023, banks, asset managers, analysis firms and experts were already projecting cuts in US interest rates in 2024.
Initially, this process was expected to begin in March of this year. However, consecutive increases in inflation, combined with a booming labor market and household consumption, led to adjustments in expectations from 7 cuts to just 1.
However, over the past few months, the acceleration of US inflation in March has proven to be a “seasonal effect” related to the rise in immigration flow and depletion of savings of families.
In this sense, BTG Pactual points out that, as of April, the scenario returned to normal. In addition, it was possible to note a “decrease in wage pressures, the normalization of the labor market and the upward risks for inflation seem reduced”.
Furthermore, the Fed Chairman's remarks, Jerome Powellin Jackson Hole, expectations of a rate cut have increased.
Given the improvement in data, “the debate on the Fed rate cut cycle has moved from 'when' to 'how' it will be conducted, focusing on the intensity and size of the cycle.”
The bank's analysts expect a sequence of five 25-point cuts between September 2024 and March 2025, followed by three more quarterly cuts. “This path would take the Federal Funds Rate to a neutral level of 3.4% by December 2025.”
They also point out that, if the expectations of most markets are confirmed, and the Fed decides to cut the interest rate by at least 25 points, a specific group of actions can benefit.
Historically, this group of stocks has soared in other rate-cutting cycles.
The bank's analysts surveyed the Fed's latest interest rate cut cycles since 1998 and compared the performance of three indexes:
- S&P 500 (index that brings together the main shares on the American stock exchange);
- Russell 1000 Growth (top US growth companies); and
- Russell 1000 Value (top US value companies).
They analyzed the performance in the 6 months after the first interest rate cut and the Russell 1000 Growth index performed best in 5 of the 6 periods analyzed.
In the last cycle alone, in 2020, the return of this index was 127% higher than that of the S&P 500. See the graph below:
The index with the best performance in the survey carried out by BTG Pactual analysts brings together the main growth actions from the American stock exchange.
These actions are known to present high growth rates e lower cash flow generation in the short term. This means that these assets have “greater potential for appreciation (capital gains) over time, to the detriment of cash returns (dividends and buybacks),” they point out.
Another important feature of this type of action is the high beta. That is, they are assets that offer more risks to the investor. In general, when a country's interest rates rise, these securities tend to be left out of portfolios.
However, “periods of monetary easing carried out by the Fed are favorable for higher beta assets (…), that is, growth stocks to the detriment of value stocks”.
Thus, the bank's analysts point out that the US interest rate cut, expected for this Wednesday (18), may be more favorable to stocks technology, e-commerce and renewable energy than for more stable sectors such as basic materials, basic services and the financial sector.
In this sense, the house made some changes to its international stock portfolio to buy now. They point out that the expectation of an interest rate cut in the US allows “adopt a riskier stance”.
As a result, the bank’s analysts reduced their exposure to the banking sector and increased their share of technology assets. Check it out:
And you can meet the 20 international actions recommended by the bank for free. BTG Pactual has provided free access to this portfolio as a courtesy.
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This material is not related to specific investment objectives, financial situation or particular needs of any specific recipient, and should not serve as the sole source of information in the investor's decision-making process. Before making a decision, the investor should carry out, preferably with the help of a duly qualified professional, a thorough assessment of the product and its risks in light of their personal objectives and risk tolerance (suitability).