There’s been increased chatter that the Federal Reserve could cut interest rates, perhaps multiple times, next year. That has provided ballast to domestic risk assets. But advisors and investors shouldn’t take their eye off the possibility of rate cuts outside the U.S. In fact, some market observers believe the European Central Bank, aided by declining inflation in the eurozone, could be compelled to reduce borrowing costs as soon as the first quarter of 2024.
That could be just what the doctor ordered regarding helping European stocks avoid another year of lagging U.S. equity benchmarks. Should the ECB lower rates, such moves could also highlight opportunity with ETFs such as the Calvert International Responsible Index ETF (CVIE).
The fund, which tracks the Calvert International Responsible Index, could be an ideal for investors apprehensive about European equities to wade into the asset class. That’s because the ETF isn’t a dedicated Europe fund.
CVIE Has European Central Bank Rate Cut Leverage
CVIE allocates nearly 16% of its weight to French and German equities. That’s pertinent because Germany and France are the Eurozone’s two largest economies. Plus, the ETF has exposure to stocks from other countries in the region. The point is that the fund could be positively levered to ECB rate cuts.
“When the hawks turn dovish, and as inflation falls to within touching distance, it is reasonable to assume that the ECB will start to cut rates,” noted deVere Group CEO Nigel Green. “We now expect this to begin in the first quarter of 2024.”
A point to consider is that rate cuts aren’t necessarily a guarantee of equity market upside. That indicates CVIE can offer some protection against ECB-related disappointment. That’s because the fund isn’t dedicated to eurozone stocks. Still, the odds seem to favor upside for some CVIE holdings should the ECB lower rates.
“A rate cut by the ECB could be expected to inject liquidity into financial markets, leading to a surge in equity prices. International investors could find opportunities for capital appreciation, especially in sectors that are sensitive to interest rates, such as real estate and utilities,” added Green.
Regarding CVIE’s other country exposures, the ETF’s largest allocation is Japan, north of 17%. Market observers increasingly believe the Bank of Japan is poised to end a lengthy stretch of negative rates. But that could be a positive for Japanese stocks because it could signal that inflation is finally taking hold there.
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