RBA rate cuts: Is it party time for stock investors?

Falling rates are a boon for the stock market, but not everyone's a winner.

If we're to believe most experts and the "market" at large, the RBA is expected to cut the cash rate on Feb 18 in what is one of the most anticipated interest rate decisions of recent years.

And with the S&P/ASX 200 index tapping a new record high on Friday, it looks like the Aussie stock market is already in celebration mode.

Low interest rates are usually great news for stocks.

It means borrowing becomes cheaper, spending gets easier and corporations get a nice boost to their bottom line.

It's the perfect recipe for a delicious bull market.

But while many sectors of the economy are cheering for lower rates, not everyone comes out a winner.

So, if we do see multiple rate cuts this year, what should investors expect?

When rates fall, stocks rally (usually)

When interest rates are lower, the cost to borrow also drops, from credit cards to home loans and company debt.

"Typically, the stock market reacts positively to a reduction in interest rates due to the ability for companies to borrow funds at a lower rate and pursue growth opportunities more aggressively," says Head of CMC Invest Fraser Allan.

This gives everyone more money to play with, fuelling business investment, corporate growth, and for us consumers, bigger shopping lists.

Meanwhile, savings rates and bond yields become less attractive -- at least compared to the returns you might get from equities. Money starts to shift from savings accounts into higher-return assets like stocks and even cryptocurrency.

"Bond markets are pricing an approximate 95% chance that the RBA will reduce the interest rate by 25 basis points from 4.35% to 4.15% meaning that investors may already have taken a position based on a predicted cut, says Allan.

While stocks might already be pricing in a February rate cut, Allan says investors will be keeping a close eye on RBA Governor Bullock's statement.

"The market will be looking for indicators on the future path for interest rates and whether this will be the first in a series of cuts."

Who are the winners?

Allan says some of the big winners in a falling interest rate environment include Consumer Discretionary stocks and REITS (real estate investment trusts). Meanwhile, the weakest performing sector tends to be financials.

"If the RBA does cut rates this will be the first time in 5 years and whilst 25 basis points doesn’t sound like much, the sentiment of inflation finally cooling to a level where the Central Bank begins aligning with global peers to drop the interest rate should not be understated," he explains.

1. Consumer discretionary stocks

These are companies that sell products we all want but don't really need. Think retailers like JB Hi-Fi (JBH), Wesfarmers (WES) and Harvey Norman (HVN), as well as travel stocks, like Qantas (QAN) and Flight Center (FLT).

Australians have been saving their pennies to combat higher mortgage rates and the cost of living crisis. A series of rate cuts could see some of that spending return.

2. Property stocks

The property sector is usually one of the big winners when rates fall because lower mortgage rates encourage more property buying.

Among the most popular property stocks are Real Estate Investment Trusts (REITs). These are listed companies that hold income earning property portfolios.

Some of the biggest on the ASX include Scentre Group (SCG), Goodman Group (GMG) and Stockland (SGP).

3. Growth stocks

Technology and other growth stocks usually do well when rates are low because they rely on borrowed funds to continue expanding and developing their products.

Australian tech stocks include Wisetech (WTC), Xero (XRO) and NEXTDC (NXT).

Who might lose out?

1. Financial stocks
Bank stocks are often expected to underperform when rates are lower because profit their margins in turn shrink.

However, depending on the health of the economy, this could also be offset by more customers borrowing. A booming property market for instance can be good news for the banks.

2. Savers

Low rates are usually good news for investors but bad news for savers. Those with cash in the bank, like savings accounts and term deposits, can expect to get lower returns.

That's particularly bad news for those that rely on these safe cash products for a steady income, such as retirees.

NAB and CommBank have already slashed term deposit rates ahead of the RBA's decision.