With the US Federal Reserve cutting its benchmark rate by a quarter percentage point on Thursday, following a larger, half-point cut in September, certain asset classes are set to benefit more than others.
The new, lower-rate era presents an opportunity for investors to consider rebalancing their portfolios.
Both the Fed rate cut and Donald Trump winning the presidential election this week could have implications for your finances.
“Interest rates can impact how different asset classes perform, but that doesn’t guarantee the same outcome every time,” says Ben Bolger, a financial planner in Abu Dhabi. “While certain trends may emerge, they aren’t always reliable indicators of what’s to come.”
On Thursday, the Federal Open Market Committee announced its plans to lower the federal funds rate to a range of 4.5 per cent to 4.75 per cent. This follows an earlier 50 basis point cut in September, which reduced the benchmark lending rate from 5.25-5.50 per cent to 4.75 – 5.00 per cent.
The highest interest rates since 2001 have been a boon for risk-averse investors who embraced cash, and high-yield savings accounts proliferated.
However, higher rates kept many buyers and sellers on the sidelines of the housing market. This is expected to change in a low-rate environment.
We asked financial experts to list the winners and losers during interest rate cuts.
Assets set to shine after a Fed rate cut
1. Equities
With the recent interest rate cuts and anticipation of further reduction before year-end, equities are expected to perform well, according to Michael Chu, head of investments at UAE investment platform Sarwa.
The markets also responded in force to Mr Trump's victory. The S&P 500 reached record highs. The dollar posted its biggest gain against major currencies since 2020 and Bitcoin surged.
All this was driven by the idea that Mr Trump’s proposed economic policies of lower taxes and fewer regulations will be a boon for business, with tariffs potentially boosting domestic manufacturing.
Companies will benefit from cheaper financing and increased consumer spending due to lower borrowing costs. As interest rates drop, investors seeking higher income may turn to dividend-paying stocks, Mr Chu says.
Mr Bolger says: “Lower borrowing costs make it easier for companies to finance operations and invest in growth, boosting profitability. This often leads to increased investor confidence, driving up stock prices as markets anticipate better corporate earnings.
“Additionally, lower rates can shift investor preference towards equities, as bonds and other fixed-income investments offer reduced returns in a lower-rate environment, further supporting stock market performance.”
Rupert Connor, partner at Abacus Financial Consultants, recommends investors pick out the relative winners in equities. This tends to be sectors that are most interest rate sensitive – ie companies that have more debt and/or pay high dividends – as their income streams become more valuable in relative terms compared to cash, he explains.
“The most sensitive sectors to interest rates are real estate and utilities. Growth stocks, specifically technology, should also be a beneficiary, however given their current elevated valuations, whether they are relative outperformers based on this rate cut is open to question,” Mr Connor says.
Martin Hennecke, head of investment advisory for Asia and Middle East at financial advisory St James’s Place, cautions investors to consider market valuations and concentration risk.
While the US continues to dominate investor attention, Asia looks increasingly like a value opportunity. Historically, emerging markets have performed well when US rates fall, and this time may be no exception, he says.
“Over the past decade, investors have flocked to the US following the strong performance of the S&P 500, leaving many overly concentrated in US equities, in particular tech stocks that represent a large proportion of the index. This surge in demand has led many to overlook attractively priced assets in Asia,” Mr Hennecke says.
“The price-to-book ratio of Asia-Pacific equities represents the largest discount to US equities in roughly 23 years, having grown to 3.3x this year, close to the 3.5x seen at the turn of the millennium.”
2. Fixed income
Any investment that provides a fixed level of interest (or coupon) will look more or less attractive when interest rates fall or rise, says Damien Maltwood, investment director at investment management firm Quilter Cheviot.
If the rate you can receive on cash goes down, a bond that pays interest that was the same as cash, but is now higher than cash, looks more attractive and goes up in price, he adds.
Mr Hennecke agrees, saying: “A falling interest rate environment is typically good for fixed interest because investors buying bonds today could lock in current rates from now until the maturity of those bonds. If we saw further substantial interest rate cuts, those bonds would become more attractive given their higher coupons compared with new bonds issued after further rate cuts have materialised.”
“Moreover, after the fixed interest market crisis seen in 2022 when inflation started to rise, the asset class hasn’t fully recovered yet due to investor shock or dissatisfaction with performance, which implies reasonable entry prices.”
However, Naeem Aslam, chief investment officer at Zaye Capital Markets, thinks bonds (especially government bonds) take a back seat and yields fall when rates drop.
Investors turn their gaze to riskier assets with juicier returns, leaving bonds in the dust, he says.
3. Gold
Gold typically benefits from rate cuts because a weakening US dollar and lower bond yields make it more attractive as a store of value, Mr Bolger says.
Lower bond yields reduce the appeal of interest-bearing assets, driving investors towards non-yielding assets like gold. In addition, as the dollar weakens, gold becomes more affordable to foreign investors, increasing demand, he adds.
head of investment advisory, Asia and Middle East, St James’s Place
Mr Maltwood explains: “There is an opportunity cost of not receiving interest on your cash if cash is moved into gold, as gold does not provide an income. That opportunity cost (the money an investor is missing out on) is less when interest rates fall, so the price of gold can rise in this environment.”
Ole Hansen, head of commodities strategy at Saxo Bank, says Mr Trump's return to the White House would also probably reinforce the bullish outlook for gold. The potential for “Trump 2.0” could drive policy changes – particularly with tariffs and inflationary fiscal policies – that historically increase demand for safe-haven assets like gold.
4. Real estate
Mr Bolger says lower interest rates generally make mortgages more affordable, encouraging higher demand in the housing market as buyers can borrow at cheaper rates.
This boost in demand often leads to increased home sales and rising property values. Commercial real estate also benefits, as businesses and investors can secure financing at lower costs, making investments in properties more achievable, he explains.
Mr Hennecke says: “Owning one’s home or investment property may help to make an investor’s overall asset base more resilient. Also, property tends to be an inflation-proof asset.
“Investors should still be careful about valuation risk, taxes where applicable, consider rental yield as well as the time and effort spent on managing it, and importantly avoid being overexposed or too highly leveraged. Where more than one property is held, diversification across different jurisdictions might reduce risk as well.”
Assets likely to sputter after a Fed rate cut
1. Cash and savings accounts
With interest rates getting sliced, cash becomes the least attractive guest at the party. You might as well stuff it under the mattress – returns dwindle, and savvy investors look elsewhere for growth, Mr Aslam recommends.
As interest rates drop, the returns on savings accounts, money market funds, and similar options are decreasing, making them less appealing, according to Sarwa’s Mr Chu.
The era of earning 4 per cent to 5 per cent in a savings account is ending. Investors could consider longer-term fixed income solutions to maintain those levels of returns, he suggests.
2. Short-term bonds
Short-term bonds tend to underperform in a rate-cutting cycle because they offer lower yields than longer-term bonds. Additionally, when rates fall, the prices of short-term bonds don't appreciate as much as longer-term bonds, which benefit more from declining interest rates, according to Mr Bolger.
As a result, investors often favour longer-term bonds during these periods, leaving short-term bonds less attractive, he adds.
