4 Trade Ideas To Position For Lower Global Interest Rates
We outline specific ideas from stocks, commodities and FX that could payoff if rates move lower in 2024.
There’s a lot of chatter at the moment between market interest rate expectations for major central banks and the rhetoric that the central bankers are telling us.
Put another way, overnight index swaps (OIS) are pricing in cuts over the next year by the US Fed, the Bank of England and the ECB. Yet this all comes despite comments that ‘it’s too early to discuss cutting rates’ or the ‘higher for longer’ posturing (particularly out of the US).
For those that think we will see interest rate cuts in 2024, it makes sense to position for that now. Even though we’ve seen a turn in the bond markets, we feel there are plenty of other ways to express this view, both from a retail and a professional viewpoint.
After a brainstorming session, here are a few of our favourite ideas to consider:
Real estate investment trusts (REITs) are a way for investors to get exposure to the property sector. In order to achieve favourable tax treatment, REIT’s have to pay out at least 90% of profits in the form of dividends to investors.
Given the rising interest rates over the past 18 months, some REIT’s have struggled as the cost of debt has soared. This has made it harder to take on new projects. Further, the sector has seen several revaluations lower in property prices, pulling down the net asset value (NAV), which is what the share price is linked to.
This presents us with an interesting situation right now. If interest rates do get cut, it should provide a stimulus for the property sector. It should invert a lot of the problems that the firms have faced recently.
There exists two main ways of profits here. Firstly, income. The dividend yield on some REITS is high right now, which can be locked in. Second, share price gains as the stock should increase back to the NAV value over time. For example, below shows the discount of the stock vs NAV for the Alternative Income REIT:
We like examples from the UK such as:
Abrdn Property Income Trust (8.33% yield)
Impact Healthcare REIT (7.99%)
Alternative Income REIT (9.42%)
Long Gold Structures
With gold not paying out any interest, the asset has a higher opportunity cost to purchase when interest rates are high.
If we do see interest rates fall, this makes gold a much more attractive option to hold in a portfolio. Not only this, but it’s important to think about why the likes of the US Fed would be pushed to cut rates. If it’s a scenario of accelerated unemployment and lower economic growth, this should see safe haven flows bid up gold as well.
Further demonstration of this could be seen from the UK and Europe, with reports this week that the UK could already be in a recession if we assume constant rates:
Finally, we would trade gold via XAU/USD as a currency pair. If we saw rates in the US move lower, this could trigger a weaker USD as the yield is less appealing. This could further help to push the pair higher.
We like the below ideas:
Spot ref $1945 , 9/11/23
Buy a 1 year Call option with a strike of $2050 with a knock-out at $2,300, costing 1.1%.
Sell a 1 year vanilla Put at $1800 strike and receive 1.22%. Investor can trade around this option at spot during the timeframe to enhance the return.
Combine both the Call and Put to have a zero cost structure.
Please note option trading carries with it a high level of risk and should only be undertaken by those with experience.
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