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It has not escaped anyone’s attention that central banks have started a cycle of lowering rates. It began in June in Europe and in September in the United States. Monetary easing continues this fall in Europe with a rate cut at the initiative of the ECB of 25 basis points on October 17, 2024. The timetable is a little less clear on the US side because the strong economic dynamism weighs on decisions of the Fed, just like the November election deadline.
If speculation on the timing of the declines and their magnitude is widely commented on by economists, managers and financial analysts, it is because they have a direct impact on the financial markets and, ultimately, on your personal finances.
A drop in rates is a paradigm shift which should lead you to review the composition of your assets, because certain investments benefit from it. Which ones? How to invest in the current context? Our explanations.
The drop in rates penalizes risk-free products
With measured inflation and a slowing economy, the European Central Bank is now pursuing a policy of monetary easing. To do this, it notably chose to lower its key rates. The policy rate, or refinancing rate, is the rate at which the Central Bank lends its money to banks. And a reduction in key rates permeates all credit layers. Thus, through a domino effect, a reduction in key rates leads to a reduction in the rates at which banks lend money to each other, a reduction in the rates at which banks lend money to businesses, a reduction in the rates at which banks lend money to individuals… Cheaper credit leads to an increase in consumption and an increase in business production.
But a drop in key rates also leads to a drop in the performance of risk-free or low-risk investments such as savings accounts, euro funds, bond funds or money market funds, assets which largely depend on the evolution of the stock market. rate. The higher the rates, the higher the rates and returns these investments have. The lower the rates, the less attractive they are and the less they earn. For example, the A savings account should see its rate drop significantly from February 1, 2025. We are already seeing a significant drop in term accounts. Boosted booklets show rates of return over the first year that are much lower than what we could see in 2023, or even at the start of 2024.
Should we therefore give up on these risk-free investments? No, certainly not. You must always keep investments with guaranteed capital, even if they yield less and less to preserve your precautionary savings. You can also use these risk-free investments to save sums intended to finance short-term projects.
The drop in rates favors risky investments
As we have just seen, with the fall in rates, risk-free investments yield much less. Risky assets then benefit from a shift by investors towards assets which certainly present more risks, but also have much greater performance potential. Investors are more inclined to position themselves in risky but potentially high-reward assets like stocks if risk-free or low-risk investments perform well below stocks. Let us also add that certain stocks benefit from the fall in the cost of credit. Indeed, sectors of activity will be able to benefit more from the drop in rates, particularly those where companies are very dependent on credit (cheaper with a drop in rates) to finance their development, such as for example the biotech sector or the technological, but also in general the entire growth segment.
Thus, stocks on the stock market will benefit from this renewed investor interest in riskier assets sensitive to variations in the cost of credit, but also private equity. Thus, listed and unlisted stocks allow you to benefit from falling rates. You can invest in the main global stock indices via ETFs or on sector trackers to target the sectors of activity most sensitive to rate drops. As for private equity, it remains difficult to invest directly as a business angle but we can position ourselves on funds like FCPR or FCPI for example.
Before rushing into stocks, be careful to take your risk profile into account and invest a portion of your assets in line with your risk appetite. Shares remain assets with a risk of capital loss, which must be considered in the long term, particularly in the case of private equity investment which has very low liquidity.
The fall in rates benefits the real estate market
Finally, of course, the real estate market benefits from a reduction in key rates since this induces a reduction in property loan rates. After excessively high rates which kept many potential buyers from realizing their real estate project, the drop in rates offers a breath of fresh air to the market which has suffered greatly in recent years. In the first half of 2024, the fall in mortgage rates was rapid, of around 9 basis points per month. The decline was slower during the summer period and a new phase of decline began in September. Credit production should experience a new boom in the fall of 2024. Prices are slowly rising, still very unevenly across the country.
Several avenues can be considered for positioning yourself on the real estate market, including direct investment through the purchase of the main residence or a rental investment, which will allow you to benefit from lower rates. Stone-paper (SCPI or SCI for example) can also be considered if you have limited capital to invest and want to be exempt from all management. Finally, listed real estate companies are also a wise option in this case, but more volatile.
Be careful, in all cases the risk of capital loss exists and you will have to be selective. Also pay close attention to your investment horizon, which must be long enough. Finally, remember that your assets must be properly diversified and consider the weight of real estate assets in your overall assets before any subscription.
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