The ECB has lowered rates to 4.25% this week. Cheaper financing benefits the stock market and the most indebted securities. Conservative savers are on guard.
This week, the European Central Bank made its first rate cut since 2016. It fulfilled the script and lowered them by 0.25 points, to 4.25%. However, the European institution revised its inflation projection upwards and does not expect to meet the price stability goal until 2026, which gives it agility for new cuts.
“The market had more than priced in the latest drop because it has already been well telegraphed by the ECB,” comments Diego Fernández, an analyst at Sabadell. Their attention was focused on the subsequent message in search of clues about the ECB’s next movements, and the fact that President Christine Lagarde was cautious about future movements was, in the first reading, an encouragement to the banks on the Stock Market and a disappointment for the most indebted companies.
The non-financial companies of the Ibex had close to 166,000 million euros in net debt at the end of the first quarter. They are 3.7 billion more than in December.
In principle, lowering rates works in favor of the stock market, since it allows companies to grow and finance themselves more cheaply. Furthermore, the comparison with the profitability of lower risk products improves for equities. In fact, we have already begun to notice that the profitability of deposits and more conservative savings products is reducing.
But experts consider that the small rate cuts that are planned will have a slight effect on the markets and in many cases are already discounted and incorporated into the rate curves.
“The most affected assets are monetary assets (deposits, bills and funds) whose yields will decrease even in anticipation of the ECB’s movements. We predict that the 12-month Euribor will be around 2.6% already in mid-2025,” says Roberto Scholtes, Chief Strategy Officer at Singular Bank.
As long as they are not accompanied by recession, rate cuts are good for the stock markets, but for the rate change to have a notable effect the ECB would have to lower at least 100 basis points.
Real estate companies, renewable companies and those in debt celebrate the low rates
Real estate and utilities are historically two of the sectors that benefit the most from rate cuts on the stock market. “Better financing conditions and higher margins per project should boost the behavior of these sectors,” Tressis points out.
The securities that benefit most from the rate cut are those whose business depends on a high proportion of debt, such as real estate, electricity, renewable and infrastructure companies.
The heritage real estate business is gaining attractiveness, in which investors compare its profitability with that offered by public debt. GVC Gaesco highlights Merlin, “which is also positioning itself for data center activity, which is expected to grow a lot,” explains Víctor Peiro, the entity’s director of analysis.
“The real estate sector is favored both by valuation and by the reactivation of mortgage granting,” comments Roberto Scholtes, of Singular Bank.
“Real estate should benefit from the lower rates because greater visibility is given to possible future refinancing in a traditionally leveraged sector. From an operational point of view, the sector will continue with good performance derived from the rigidity of demand in in the case of residential, and economic growth, employment and inflation in the case of tertiary,” says Javier Díaz, Renta 4 analyst.
Analysts trust the residential developers Neinor and Aedas. They justify it by the growth in the construction and sale of homes, and, therefore, their profits and cash generation.
Both have their activity concentrated in metropolitan areas, which benefit from further price increases and a shortage of supply. In addition, they are listed at a high discount to the value of their assets, have a higher dividend yield than Socimis, above 10% by 2024, and still have room to repurchase shares.
Among the energy companies “we highlight Solaria and Enagás, which are quoted cheaper than the sector average,” comments Peiro.
UBS analysts see near double-digit growth in the sector after a decade of negative revenue growth, with the renewables area providing an extra boost.
If the reductions continue, renewable companies could see their projects activated again once the tightening of financing conditions is completed. Acciona Energía and Solaria are among the most penalized values this year on the Ibex and have a recovery potential of more than 15%, according to the consensus.
Bankinter points out among its favorites Iberdrola, which despite being the Ibex company with the most debt (more than 45,000 million at the end of the quarter), also generates a lot of cash. “The 2026 Strategic Plan expects to achieve an EBITDA of between ¤16,500 and 17,000 million, with an average annual growth of between 4.6% and 5.6%. The net profit would be between ¤5,600 and 5,800 million, with an average annual growth of between 5.3% and 6.5%,” they explain at Bankinter, which does not rule out upward revisions to these objectives.
Singular Bank sees electricity companies as favored, although it recognizes that they are increasingly less leveraged, and on top of that they have their debt at fixed rates and long terms, but in any case, lowering rates is a positive factor for electricity companies, according to Scholtes, Director of Strategy of the firm.
Other listed companies that benefit from lower rates are indebted companies such as Cellnex. The cell tower company accumulated a lot of debt during the time of low rates and now has to deleverage with divestitures and cash generation. At the end of March it exceeded 21,000 million in debt, 2.6% more than in December.
GVC Gaesco also points out as winners in a context of lower rates, companies that have carried out an ambitious acquisition program and have taken on debt with reference to the Euribor, such as Audax and the health company Atrys.
In the opinion of Diego Fernández, an expert at Banco Sabadell, the slight drop in rates and the fact that a worsening of the economic situation is not expected means they are positive with infrastructure companies, such as Sacyr and Ferrovial, and indebted companies, such as Meliá, IAG and Amadeus.
Telecommunications companies also gain in this context. Telefónica, which exceeds 28,000 million and Cellnex, which exceeds 21,000 million, are the Ibex companies with the largest net debt and will receive relief from the rate reduction that will allow them to finance themselves more cheaply.
“Any company that has floating debt, that is, indexed to the Euribor, will begin to have more available cash flow as soon as the decreases are transferred to its interest rate. Also companies with debt maturities in the coming years, given who will be able to refinance it more easily and at rates that will allow them to have greater cash flows,” says Ignasi Viladesau, Investment Director of MyInvestor.
UBS points out that among those favored are small companies, which are generally more indebted and have variable interest rates, rather than fixed ones, and with shorter terms than large companies.
The technology sector also benefits from lower rates, since although many of its companies are not in debt, they benefit from the discount rate of future profits, by lowering the risk-free rate. But experts acknowledge that they don’t expect long-term debt yields to move much in the short term either. It will depend on whether rates continue to fall.
Banks and insurers withstand the challenge
The lowering of rates by the European Central Bank puts the focus on the banks of the euro zone, which, in theory, are harmed by lowering rates because this movement could put pressure on interest margin differentials.
From GVC Gaesco they believe that financial companies such as banks or insurance companies will lose part of their results if the rate references are reduced. “In this environment we see Mapfre and Sabadell Unicaja and CaixaBank more exposed,” says Víctor Peiro, director of analysis.
“The higher interest rates have meant more income from intermediation, which has driven the profits of these companies to historical highs. With the decrease, the income of these companies, linked to the interest collected, should decrease. So we may have seen a maximum in that line of the income statement,” says José Francisco Ibáñez, equity analyst at Tressis.
The cut in the price of money harms some companies that have a net cash position, such as Inditex, which may reduce their financial income, although analysts emphasize that they do not expect the impact to be very relevant. Inditex presented results this week that beat forecasts and have taken its price to historical highs. The textile firm has skyrocketed its net financial position to 11,623 million, the highest in its history.
Most experts are not so clear that on this occasion this decline will harm the financial sector. On the one hand, the cut is very slight and it is not expected that in the short term the price of money will return to the low levels of previous years with which banks had to deal with zero rates. They have dropped 25 basis points, to 4.25%, which still leaves a profit margin. Furthermore, banks “can benefit if declines stimulate demand,” says Álvaro Arístegui, from Renta 4.
“The effect of the decreases is, in general, positive. Even for banks if rates remain relatively high and the economy continues to grow. The impact on margins is slow (there are hedges and the impact on assets and liabilities is delayed) and it is compensated by the increase in commissions and the containment of late payments,” explains Roberto Scholtes, of Singular Bank. He further adds that as many banks are buying back shares, the sector’s earnings per share will grow even if the ECB cuts rates.
“This downward cycle may not be like the previous ones, where they fell because there was some type of recession or crisis. In this case the downward cycle may be interrupted and, therefore, the effect on companies and securities will not be the same. At most, two declines expected this year will have little impact. Banks will continue to benefit from relatively high rates compared to the 10 years prior to 2023. In addition, credit will recover without having many problems with bad debts,” says Diego Fernández, from Sabadell.
Added to this is that banks have been able to transfer a lot of their clients’ mortgage debt at a fixed rate, giving very attractive conditions. Clients secured a fixed rate lower than the 12-month Euribor plus the spread and banks lost some of the increase, but the impact on interest margin was very positive and at the same time they protected themselves from declines.
“The ECB’s rate cut will support lending growth at euro zone banks after months of weak lending activity. The lower rates will also provide relief to vulnerable borrowers, reducing banks’ asset risk,” he said. Fabio Iannó, senior vice president of credit at Moody’s Ratings.
