- Rate cut imminent amid moderating inflation risks and rising downside risks to employment
- Five to six rate cuts expected by Jan 2025
- Historically, utilities, consumer staples, and healthcare tend to outperform 3 months after 1st cut
- Utilities offer attractive dividend yield of 3.0%; appeals to income-seeking investors
- From a barbell perspective, these sectors complement our long-term exposure to tech-related plays
Dovish speech at Jackson Hole signals imminence of Fed monetary easing cycle. At the Jackson Hole conference, Fed Chair Powell announced that the time has come to adjust monetary policy amid sharp moderation in US headline inflation, which fell from a peak of 9.1% y/y in June 2022 to 2.9% in August. The Fed’s preferred inflation gauge, the PCE price index, has also touched 2.6% y/y in June. With inflation now on a clear path towards the central bank’s 2% target, Powell expressed confidence in the inflation outlook while highlighting increasing downside risk to employment.
Against this backdrop, a Fed rate cut in September is all but locked in. Based on Fed Funds futures, traders are currently pricing-in a 100% probability of one cut in September, and 31.9% chance of a second cut. A total of five to six cuts are expected by Jan 2025.
Learning from history: Beneficiaries of Fed rate cuts in past cycles. Analysing data from the most recent four rate cutting cycles unveils that utilities, consumer staples, and healthcare have, on average, outperformed the S&P 500 by 9.0 %pts, 4.3 %pts, and 4.2 %pts respectively on a three-month basis after the initial cut. We delve into each of these sectors to explore the underlying factors driving their outperformance:
1. Utilities: The utilities sector possesses consistent revenue streams due to its provisions of basic necessities such as electricity, water, and gas. Additionally, utilities currently offer a dividend yield of 3.0% (vs S&P 500's 1.4%) and this is attractive for income-seeking investors, particularly in an environment of falling bond yields. As interest rates decline, yield-focused portfolios will progressively shift allocation from bonds to income equities and this phenomenon augers well for the trajectory of utilities companies.
2. Consumer staples: The demand for consumer staple goods is essentially inelastic as consumers still need to purchase them regardless of the economic situation. Moreover, the lower interest rate environment also reduces the interest expense of consumers, enhancing their spending power. Companies providing “value” goods selling at lower price points will benefit as consumers trade down.
3. Healthcare: Similar to utilities and consumer staples, the demand for healthcare is broadly inelastic regardless of the macro environment and this is particularly so in an aging society. Furthermore, pharmaceutical and biotechnology companies require significant capital for R&D to drive innovation and new product creation. Moderating interest rates reduce the cost of borrowing for R&D expenditures.
Exposure to defensive plays complements our long-term conviction view on technology. Gain exposure to utilities, consumer staples, and healthcare sectors to ride the tailwinds from falling bond yields. From a “barbell” perspective, the resilient and defensive nature of these sectors complements our structural long-term exposure to technology-related plays. Despite overall growth moderation, we expect Big Tech to stay resilient given their diversified revenue streams.
Figure 1: Outperformance of utilities, consumer staples, and healthcare post-rate cut
Source: Bloomberg, DBS
Download the PDF to read the full report.
Topic
This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.
This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such.
The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.
All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you. DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein. In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion.
Any information relating to past performance, or any future forecast based on past performance or other assumptions, is not necessarily a reliable indicator of future results.
The information contained in this article has been obtained from sources believed to be reliable, but DBS makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose.
If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
If you have received this communication by email, please do not distribute or copy this email. If you believe that you have received this e-mail in error, please inform the sender or contact us immediately. DBS Group reserves the right to monitor and record electronic and telephone communications made by or to its personnel for regulatory or operational purposes. The security, accuracy and timeliness of electronic communications cannot be assured.
Please refer to the Additional Terms and Conditions Governing Digital Tokens for DBS Treasures Customers for more specific risk disclosures on trading of digital tokens.
This information does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or enter into any transaction. It does not have regard to your specific investment objectives, financial situation or particular needs. It is not intended to provide, and should not be relied upon for accounting, legal or tax advice.
Cryptocurrency trading is highly risky and prices can be very volatile. All investments come with risks and you can lose your entire investment. Before you decide to purchase an investment product, you should read all the relevant documents and carefully assess if it is suitable for you. Invest only if you understand and can monitor your investmen. Diversify your investments and avoid investing a large portion of your money in a single asset type.
Trading in Cryptocurrencies or the instrument (“Instrument”), such as ETF, referencing or with underlying as Cryptocurrencies ("Crypto-Products”), such as Bitcoin ETFs, is highly risky and prices can be very volatile. All investments come with risks and you can lose your entire investment. By trading in Crypto-Products, you are exposed to the risks of both the Instrument and the Cryptocurrencies. Further, Crypto-Products listed on overseas exchanges may not be regulated in Singapore, and are subject to the laws and regulations of the jurisdiction it is listed in. Before you decide to buy or sell Cryptocurrencies or Crypto-Products, you should read all the relevant documents and carefully assess if it is suitable for you and/or seek advice from a financial adviser regarding its suitability. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single asset type.
To the extent permitted by law, DBS accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this email or its contents. If this information has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses.
Please refer to Terms and Conditions governing your banking relationship with DBS for more specific risk disclosures on the Instrument (such as ETFs under Funds) and Digital Tokens.
This information is provided to you as an “Accredited Investor” (defined under the Securities and Futures Act of Singapore and the Securities and Futures (Classes of Investors) Regulations 2018) for your private use only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, and may not be passed on or disclosed to any person nor copied or reproduced in any manner.
DBS (Company Registration. No. 196800306E) is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore (the "MAS")