Rising interest rates have caused corporate bond yields to increase significantly in Europe and the US — with major implications for companies with large amounts of debt. These firms will likely experience higher costs from increased borrowing. “As interest rates continue to rise, corporate bond yields may see further upward pressure, we think that stocks with low debt exposure and a higher quality of debt should outperform,” analysts from investment bank Bernstein said in a note to clients on Jan. 19. Historical analysis done by the analysts shows that when European bond yields rise, stocks with low leverage tend to do better than highly leveraged ones by a larger margin compared to when rates are falling or staying the same. Additionally, investors tend to gravitate towards lower-debt stocks during recessions, as they become less risky due to their ability to cover higher interest payments from their earnings without borrowing additional funds at much interest rates, the analysts said. The table below shows the six European low-debt stocks with a buy rating from Bernstein and an investment-grade credit rating: The MSCI EMU ex-Financials Index stocks above all featured in a Bernstein screen based on a combination of sector net-debt- to-equity ratios and credit ratings. Net-debt-to-equity ratio measures how much leverage a company has relative to its total equity, indicating the financial health and stability of the business. Typically, a value below one would be considered relatively safe, whereas values of two or higher might be regarded as risky investments. Pan-European aircraft manufacturer Airbus and Norwegian energy company Equinor stand out for having a negative debt-to-equity ratio, which means the companies have more equity, backed by assets, than debt. Analysts’ consensus share price targets for both companies also point towards around 20% potential upside. Airbus’s share price has risen by more than 2% over the past year amid a slump in the broader stock market. The company has seemingly benefited from the woes engulfing its chief competitor Boeing. Multinational Dutch conglomerate Koninklijke had the largest potential upside of 27% among the stocks on the list. All the stocks listed, including Publicis, LVMH, and L’Oreal, are accessible to US investors as ADRs on US exchanges and over-the-counter markets.
