The Bank of England committee that’s responsible for setting monetary policy decided to cut interest rates earlier this month. Economists expect that another one or two cuts will be seen before the end of this year. The move lower is generally positive for the stock market. Yet here are some specific UK shares that I think could be primed to outperform.
The man on the street
Next (LSE:NXT) is a well-known clothing and homeware brand. The business has already been outperforming the broader FTSE 100, with the stock up 47% over the past year.
However, I think this rally could continue as interest rates fall further. This is because the prime demographic for Next is the everyday man on the street. It’s not high-end luxury with a big price tag, or bargain basement low-quality gear. What this means is that it should see demand grow as people start to spend more. After all, when interest rates fall, it creates more of an incentive to spend rather than save.
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If customer sentiment improves, people tend not to spend more on basic goods, but rather on brands they like. Given that we’re not expecting an economic boom tomorrow, I don’t see people splashing cash on luxury. So Next is the perfect in-between level where I believe people will spend at.
As a risk, Next is also impacted financially by some external factors. For example, poor weather can hurt performance. I simply can’t forecast for this future occurence.
More loan business
NatWest Group (LSE:NWG) is a collection of banks, including NatWest and Coutts. It has a strong client book in the retail, private wealth, and corporate space. The share price is up 55% over the last year.
These client segments often rely on small business loans, mortgages, and personal loans to help things run smoothly. If interest rates continue to drop, this will make the rates on these products cheaper. This doesn’t mean NatWest necessarily makes less money. But it does mean that consumers and businesses are more likely to take out more loans.
The risk is that NatWest will make a smaller margin on these products, with net interest income falling. This is true, but overall I think the increased amount of loan business the group will do will offset this impact.
Cheaper debt
Finally, I’ve got Tritax Big Box (LSE:BBOX) on my watchlist. The real estate investment trust (REIT) has jumped by 20% over the last year. The trust owns the UK’s largest logistics land platform.
The size of the buildings and new projects that get taken on are significant. This means that the company has to take out loans in order to facilitate the purchases. In the half-year update, the loan-to-value ratio was 29.9%. So for every £100 worth of property, £29.90 is debt.
The servicing and paying of the debt gets cheaper if interests rates are lower. In turn, this reduces the overall costs of operating. Assuming that revenue stays the same, lower costs should help the REIT to become more profitable in the future.
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One concern is that due to the size of these projects, a lot of money is tied up. Therefore, generating quick cash for emergency funds is difficult.
I think all three ideas could do well and am thinking about buying.
