European shares defied conventional wisdom and soared both times in the past when eurozone interest rates were raised for the first time after a series of falls.
But this time will probably be different, according to analysts at HSBC, who warned traders to brace for a wobble over the next few months if and when interest rates rise.
The European Central Bank is widely expected to raise its base rate as early as today from 1 per cent — a record low level at which it has been pegged for 23 months.
The ECB has in recent weeks hinted that a policy tightening is imminent amid worsening inflation. Eurozone inflation rose to 2.6 per cent in March, the highest since 2008 and well above the target of just under 2 per cent.
Since the single currency was created in 1999, there have been two “turning point” rate rises — in November 1999, when the benchmark refinancing rate was raised from 2.5 per cent to 3 per cent, and in December 2005, when it rose from 2 per cent to 2.25 per cent. In both cases, eurozone stocks performed well in the ensuing months. However, then the eurozone rises came months after US interest rates had already been raised and markets had had time to digest the risk of an increase, HSBC strategists said.
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This time a rise is likely to be well in advance of any move in the US. “Even though discounted by rates futures, we find it hard to think that it would not come as a negative surprise to European equities,” HSBC said.
It forecast a wobble in world equities over the next few months amid rising rates as well as the higher crude oil price and narrowing company profit margins. “We expect the next few months to be tricky for global equities.”
But the analysts added that they did not expect a large fall because shares were already cheaply valued by most measures. World shares are priced at just 12.1 times expected profits per share this year, compared with a long-run average of 16.2 times.
Interest rate rises traditionally dampen company profits because they raise the cost of borrowing for business and reduce disposable incomes.