The ECB sees greater sensitivity of equities to rates

The rise in interest rates by the European Central Bank (ECB) was one of the main ills that afflicted the European stock markets throughout the calamitous 2022. Now, in addition, the monetary authority itself is raising its voice of alarm and pointing out that listed companies on the continent are becoming more sensitive to interest rate rises, so another similar episode could be even more damaging.

This is indicated by the chief economist of the Frankfurt-based institution, Philip Lane. In his opinion, there is an increasingly prominent role played by intangible assets in company income -with an increasing weight of electronic commerce and innovations as the main examples- and this situation, if it continues to grow, "could lead to a greater sensitivity to interest rates.

Traditionally, more industrial companies have had a greater weight of tangible assets and cash flows that are easier to measure, making them more predictable in times of rising financing costs.

Technology companies, on the other hand, are par excellence those with the greatest presence of intangibles and, with this, show greater sensitivity to interest rates.

This situation is reflected in the market, with the most famous technological index, the Nasdaq of the United States, losing more than 30% in 2022, compared to more moderate falls in the rest of the selective ones.

But the gap between one and the other firms is getting smaller, as Lane appreciates. The experts explain that technology is increasingly transversal and affects all sectors, which makes the greater sensitivity to interest rates that will be felt in all stock markets structural.

"This supports that the stock market valuations of companies are much more affected by changes in interest rates than in the past," says the ECB's chief economist.

This year, the ECB is expected to take rates to 4%, which would be a 400 basis point rise from 0% where the hike began in July 2022.

In a context of increasing sensitivity, the refuge of investors in the stock market against increases in interest rates could be limited to companies positively affected by the increase in the price of money. Fundamentally, these are actions in the financial sector such as banks or insurers that also have intangibles, but may be out of focus due to the direct improvement that an increase in rates implies in their income statement.

The last month of March, however, has shown that even among these titles the investor must select prudently, since a more managed balance sheet can detonate in times of monetary tightening, as happened in the US with Silicon Valley Bank.