Interest Rate Cuts are good for Equities

Good Morning Ladies and Gentlemen

”More jargon equals more bullshit, and more bullshit equals more billable hours.”

Phil Elwood

Cut Number 1

As anticipated, the ECB has reduced the deposit rate by 0.25% to 3.5%. This action positively influenced European financial markets, while currency markets remained relatively stable. Following ECB chief Christine Lagarde’s remarks on future interest rate policy, the euro strengthened further. She indicated that the ECB would base its decisions on meeting-to-meeting data and refrain from committing to a specific interest rate trajectory. I am not the biggest ECB fan, but this makes sense to me.

Cut Number 2

The Ministry of Labour announced in Washington Yesterday that initial jobless claims rose by 2,000 to 230,000. Economists had expected an average of 226,000 applications. The previous week’s figure was revised slightly upwards by 1,000 to 228,000. Financial markets pay close attention to jobless claims because they are considered a timely indicator for the US labour market. The US, the labour market plays a vital role in the Fed’s monetary policy decisions. These increases are relatively moderate and, thus, not an indicator of a weakening economy. The Fed’s expected interest rate cut will be added to yesterday’s ECB cut next week. I currently expect a reduction of 0.25%, which is reflected in future prices.

Cut Number 3

Let us examine the Swiss National Bank. The SNB key interest rate currently stands at 1.25%, effective 21 June 2024. In Switzerland, there has been a consistent decline in inflation over the past few months. In August 2024, consumer prices in Switzerland rose by 1.1% compared to last year, remaining unchanged from July. In December 2023, the Swiss inflation rate was recorded at 1.7%. There is a strong possibility that Thomas Jordan, the President of the board of directors, will lower the base rate at his final policy meeting before retiring at the end of September.

Financial markets like interest rate cuts

In general, a decrease in interest rates, known as interest rate cuts, creates a more favourable environment for stocks. The question is, of course, to what extent the markets have already factored this into their pricing.

What is a high-quality company?

I am often asked what a high-quality company is and how I go about choosing companies to invest in. Well, Ladies and Gentlemen, defining a high-quality company is complex. Quality encompasses many factors that should be evaluated from a long-term perspective spanning several years. Profitability is critical; the company must consistently generate profits to cover costs and facilitate sustainable long-term growth. Strong innovation, a solid market position, and competitive pricing contribute to robust profitability. Quality companies are distinguished by their ability to achieve sustainable development. It’s vital to balance investing in expansion and nurturing existing business areas. Excessive growth can strain a company’s financial reserves, so prudent financial management is essential. A solid balance sheet is another hallmark of a quality company. Managing growth to maintain a healthy balance sheet is critical to mitigate the risk of bankruptcy from excessive debt. Positive free cash flow and a healthy balance sheet are strong indicators of a company’s financial strength. It demonstrates the cash available to the company after covering all operating expenses and investments. Positive free cash flow provides a company with flexibility, enabling it to consider options such as debt repayment, dividends, or further expansion. These are my primary considerations.

Ladies and Gentlemen

As always, please share your opinion with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

I wish you an excellent start to the day and the weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li