We all know how much inflationary pressures and interest rate play a part in sustaining this big bull market within the financial market.
An interest rate cut generally stimulates economic activity by reducing the cost of borrowing, which will then trickles down to benefit several sectors of the economy.
In this article, we’ll explore some of those sectors that might benefit from a potential sector rotation within these changing market conditions.
1.) Real Estate Developer or REITs
Needless to say, industries within the real estate space or investment trusts related to real estate will get the biggest cheers to a lower interest rate as this sector was traditionally the most leveraged and vulnerable to conditions that sustain a prolong high interest rate.
NikkoAM-STC Asia REIT (Ticker Symbol: “CFA”) is a familiar name amongst Singaporean investors as this gives an easy proxy to real estate investments across major Asian markets like Singapore, Hongkong, Japan.
The ETF boasts a diversifed portfolio of REITs such as CapLand IntCom Trust (10.4%), CapLand Ascendas Reit (10.1%), LINK Reit (9.6%), Embassy Office Parks Reit (6.5%), and more.
The last few years have been a laggard for this sector as inflation continues to remain sticky and high while interest rate continues to hover around the high. With recent inflation numbers coming in lower in Jun compared to prior month, which helps further the case for a potential rate cut in Sep, this sector has rebounded over the past week, outperforming the STI index.
One name I like within the ETF is CapLand Ascendas Reit as the portfolio comprises of 230 investment properties in Singapore, Australia, US, and UK. Its a blue chip REIT that is well managed over the years and dish out a very respectable dividend of 5.5% at current price after the recent run-up in price.
2.) Utilities
Utilities are typically considered a defensive play to most investors due to its stable “bond” proxy like play that displays and generates stable dividend payout that makes up most of investors’ total returns.
With interest rate coming down lower, the attractiveness of these dividend increases, drawing investors who are seeking for higher than the risk free rate returns in the market to come back and have a bite at the sector once again.
The Utilities Select Sector SPDR Fund (Ticker Symbol: “XLU”) is an ETF that tracks as a proxy to the utilities sector within the S&P 500 companies.
The ETF Fund holds a diversified portfolio of utility companies, including major players in the space such as NextEra Energy (14.2%) , Southern Company (8.1%), and Duke (7.5%).
While doing decently, most notably over the past 90 days, the ETF has been lagging the SPDR S&P 500 ETF at +12.52% vs +17.82% YTD as of writing.
With the potential sector rotation continue taking place in the view of lower interest rates, this sector could be one of the winners in the 2H of the year.
One name I like that is within the ETF is NextEra Energy – with forward earnings at 20x multiple and lower than most peers valuation at the moment. Revenue growth is expected to grow at 6-8%, and management reiterated its commitment towards dividend growth of 10% in both 2025 and 2026. There are clearly cheaper utilities and energy plays out there, but the sectors should benefit overall from the lower interest rates to come.
3.) Consumer Discretionary
Consumer discretionary has been a laggard for some time because its’ growth is highly dependent upon the nature of consumers coming in to boost spending for the sectors to grow. When we have sticky inflationary pressures that hit right into the sectors, consumers will inevitably take a step back to re-evaluate their decisions on purchasing before making further commitments.
With interest rate expectations coming lower, it should give comfort to consumers over their confidence to make purchases and increase their spending power and needs.
The Consumer Discretionary Select Sector SPDR Fund (Ticker Symbol: “XLY”) is an ETF that is closest to the proxy to the Consumer Discretionary play within the S&P 500. This index includes companies from the consumer discretionary sector of the S&P 500.
The ETF Fund boasts a diversified portfolio of companies that includes the likes of goods and services within the retail, automotive, household durables, media, and consumer retails.
The fund’s top 3 components made up of 50% of the overall constituent of the index and it is made up of companies such as Amazon (22.6%), Tesla (17.9%), and Home Depot (9.3%). The rest includes the some of the more familiar names we know like McDonald (4.2%), Booking Holdings (3.6%), Lowe (3.5%), Nike (2.3%), Starbucks (2.2%), etc.
The ETF has been lagging the SPDR S&P 500 ETF at +7.09% vs +17.82% YTD as of writing.
However, you can see that within the past 90 days and 30 days, it has been tracking much closer and outperforming the S&P 500, which could see a sign of a potential sector rotation.
If you ask me for individual names within the sectors to load, I will probably give the likes of McDonald and Nike a skip for now due to its clear technical downtrend and a tough FY25 guidance and growth slowdown to come. Other names however like Home Depot is probably a better bet worth buying in.
Conclusion
I think we are still relatively early in some of the run-up in these sectors if the sector rotation is indeed in play. With the S&P 500 most dominated by the run up from the magnificent 7 and the AI world domination companies such as Nvidia and AMD, we might see a potential reversion to mean as investors cash out on these profitable trades and move into laggards play.
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