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ECB cut could be positive for equities say pension funds

EUROZONE - The 50 basis point cut in Euroland interest rates announced by the European Central Bank is seen as having a generally positive effect for pension funds, despite having been largely priced into the market.

Louis Chaillet, head of investments at the SBA pension fund for medical doctors in Utrecht, says that bond markets across the spectrum had been expecting such a reduction for some time and had incorporated the reduction.

“However, I do not think that it has been fully priced into the equities market yet,” he says. He expects the impact to be positive for equity markets.

Chaillet noted there would still be the long term problem for pension funds aiming to meet the projected returns on assets, which typically can be 3 or 4%. The lower yield on bonds would make that harder to achieve.

At Pragma Consulting in Brussels, Koen de Ryck also reckons the reduction “has been largely priced in” on the fixed income side, but felt that it would be beneficial for equities, among a number of other positive factors, such as the clean-up of corporates and the end to the war in Iraq. “By itself, the rate cut is not significant, but taken in conjunction with other factors, it is positive.”

However, Herve Noel, head of group pensions and benefits at Belgian group Tractebel, sees no reason why institutions might shift from defensive cash positions back to bonds or shares as a result of the ECB announcement.

“At the moment if you’re afraid of investing in bonds because you believe there is a bubble or if you are afraid of investing in equities because you believe there is no visibility then even if your cash is yielding a little bit less I don’t think this decision by the ECB will change anything.”

As a pension fund manager, Noel says he is less concerned with day-to-day market events than the long-term approach: “We don’t really take this kind of market event into account too much. We stick to a strategy and this should not have any impact. “

He adds: “Is it going to have any impact any impact on long-term interest rates and financing costs for companies? I don’t think so, because long-term interest rates are already pretty low.

“On the other hand you could see it as a confirmation that the economic situation is in bad shape if the ECB takes that kind of measure. It was not unexpected, so I don’t think that it could have a major effect on the market.”
Fennell Betson and Hugh Wheelan

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