The value stocks in my portfolio exploded into life at the end of 2023, when markets started looking forward to a heap of interest rate cuts in 2024.
They got a reality check when last week’s figures showed inflation creeping up to 4% in December, but that doesn’t worry me. I believe inflation and interest rates are on the run. And we’ll see the results in April when last year’s energy price cap spike falls out of the annual figures.
Dutch bank ING reckons inflation will fall below the Bank of England’s target of 2% that month. If it’s right, that should spell good news for my favourite value stocks.
Assume the recovery position
It could be good news for the FTSE 100 generally, which is full of undervalued companies in sectors such as financials, housebuilding and miners.
Starting with the first of those sectors, I think Lloyds Banking Group (LSE: LLOY) should really go on a tear when rates fall. Cheaper borrowing costs should underpin house prices, helping Lloyds as the UK’s biggest mortgage lender. By firing up the economy it should also reduce personal and small business borrower defaults.
The downside is that it may squeeze net interest margins, the difference between what Lloyds pays savers and charges borrowers. Judging by how Lloyds shares rocketed in December and plunged in January, they’re highly interest rate sensitive. That bodes well for its prospects when the first cuts land.
My Lloyds shares are on course to yield around 6% this year, so I’ll treat any growth as a bonus. It could be a juicy one.
Housebuilding stocks are obvious beneficiaries too. They’ve already started recovering, for example, the Persimmon (LSE: PSN) share price has rocketed 46.73% in the past quarter. It’s still early into its recovery phase though, up just 4.28% over 12 months, but down 37.88% over five years.
Persimmon looks cheap, trading at 5.81 times earnings despite the recent rally. The yield is 4.04%, which is a far cry from the situation 15 months ago when it was almost 20%. But that was never sustainable.
The stock’s flying after an upbeat final quarter, which showed orders, completions and sales all heading in the right direction. When inflation plunges, Persimmon could lead on the next leg of the recovery.
Waiting for that bull market
I’m hoping my underperforming portfolio holding Glencore (LSE: GLEN) will also get a lift from falling interest rates. Miners usually do. Falling rates mean higher growth and rising demand for metals and minerals.
I’ve had a rough ride since buying Glencore last summer, with the stock down 12.75% over the last six months. Over one year, it’s down 26.91%. It’s dirt cheap trading at just 3.74 times earnings and has bags of bounce-back potential.
I’m ignoring figures showing a dividend yield at 8.86%, the forecast yield is closer to 4%. To fully recover, Glencore needs to see China recover and reverse recent drops in output. A full-blown recovery could take longer than I’d like, but falling inflation and interest rates should nudge it in the right direction.
The broader danger with all three is that Red Sea shipping uncertainty drives inflation back up and we don’t get those rate cuts. But if all goes well, value stocks like these three should lead the charge.
