ASX Stocks to buy when interest rates fall: Here are our top 3 sectors

Many investors are asking what ASX Stocks to buy when interest rates fall. When exactly interest rates will fall is anyone’s guess, although it seems the next direction will be in the downward direction. This will be a welcome relief to many stocks that declined as a direct consequence of rising rates.

ASX Stocks to buy when interest rates fall

When interest rates go down, certain stock sectors tend to perform better due to lower borrowing costs, increased consumer spending, and overall economic stimulation. Here are the sectors that typically benefit from a low-interest-rate environment, and particular stocks that investors should look at.

1. Consumer Discretionary

Lower interest rates tend to lead to increased consumer spending as borrowing becomes cheaper. This boosts the sales of goods and services that are considered non-essential, such as automobiles, luxury items, and entertainment. Even before the RBA acts, this sector will be aided by the Stage 3 Tax cuts that will be implemented from July 2024 and propel disposable incomes 3.5% higher in the next financial year according to the Treasury.

There’s a lot of debate as to whether the effects will really trickle through to the economy, or if consumers will just save it. We would fall into the former category. Furthermore, there is evidence to suggest that consumers may not be aware of the tax cuts, especially lower income households. A Westpac survey found only 37% expected to pay less tax…but all consumers will pay lower tax than they otherwise would have.

So, which stocks to look at?

Our 2 favourite consumer discretionary stocks are Universal Store (ASX:UNI) and JB Hi-Fi (ASX:JBH). Universal Store is a casual fashion outlet focused on Millennial and Gen Z customers, who will see a bigger boost to their incomes than they would have under the original Stage 3 tax cuts.

As for JB Hi-Fi, we accept that its flagship stores may not seen that much of an incremental benefit because they were not performing that poorly even as consumer purchasing power went backwards. Nonetheless, many forget that it white goods retailer The Good Guys, since the $900m purchase in 2016. JB Hi-Fi bought at the top of the cycle and this division has been struggling in recent months – sales in the September quarter of FY24 (1Q24) fell over 12%. Increased consumer spending power could lead to more spending here.

2. Utilities

Hang on. How can utility companies be on this list? Do consumers really have a choice as to whether or not to pay their electricity or water provider? No.

But hear us out. Utility companies often have significant capital expenditures and debt, especially companies like AGL Energy (ASX:AGL) that are facing huge capex bills as they transition towards clean energy. Lower interest rates reduce their borrowing costs, improving profitability and cash flow.

3. Information Technology

Yes, we’re stating the obvious here. For various reasons, lower interest rates increase the valuation of tech stocks. These include, but are not limited to, an increased cash flow from reduced borrowing costs, increased demand from consumers and increased valuations from analysts.

Some tech stocks have recovered from the Tech Wreck, such as Xero (ASX:XRO) and NextDC (ASX:NXT). Others, however, have been treading water for the last couple of years, and the tide might be about to turn for some of them as interest rates fall.

Blue Horse Shoe loves these 3 Tech stocks!

Our 3 favourite tech stocks are Infomedia (ASX:IFM), Weebit Nano (ASX:WBT) and ReadyTech (ASX:RDY). Infomedia, which was founded in 1987, provides cloud-based parts and service software to the global automobile industry. It has over 250,000 active users in 186 countries. Meanwhile, Weebit Nano is in pole position to supply the semiconductor industry with a great replacement of Flash Memory at substantially lower resolutions than what Flash can do. The company is currently pursuing commercial deals with big industry players. Check out our research on WBT here!

Lastly, ReadyTech is a provider of SaaS technologies in Australia to the education, government and corporate sectors. Its offerings include (but are not limited to) asset management, property, licensing and compliance, finance, HR and payroll, and customer management products. We expect investors to pay closer attention to these stocks are interest rates begin to fall.

What are the Best ASX Stocks to invest in right now?

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