UK stocks have struggled due to higher interest rates. Plus, rampant inflation, albeit currently lower than the highs of previous months, hasnn’t helped. Adding geopolitical issues into the mix, it’s no wonder stock markets globally have been hampered.
As the Bank of England (BoE) announced the first rate cut last month, I’ve been thinking about which sectors and stocks may benefit if they continue to do so.
Let me explain my thinking, and break down one pick I’d love to buy if I had the cash to spare at present.
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Sectors I’ll be watching
Personally, I believe sectors such as property, house builders, and consumer goods will see the most benefit of falling rates.
Lower inflation, and lower rates could translate into more money in consumers’ pockets to spend. Lower inflation means less to pay on items like food, and lower interest rates could mean mortgage prices, or interest rates on loans, could come down.
I understand this is all theoretical at the moment, and economic turbulence isn’t a thing of the past just yet. However, green shoots of economic positivity are emerging, if you ask me.
Focusing on the house building sector, I reckon it’s the biggest potential beneficiary from rate cuts. Inflation meant the higher cost of materials dented margins. Higher interest rates meant mortgages were less affordable, and sales slowed down. If building costs and mortgage rates come down, completions, sales, and new business could spur on new levels of earnings. Plus, the fact demand for housing is outstripping supply offers house builders the opportunity to boost the coffers for years to come.
One pick I like
Vistry Group (LSE: VTY) shares have risen sharply in the past 12-months, up 70%. At this time last year, they were trading for 785, compared to current levels of 1,339p.
I reckon a big part of this rise has been impressive results, what looks like a good balance sheet, and exciting future prospects.
Sharing some key takeaways from 2023 results, Vistry reported operating profit of £487.9m for 2023, up 8.2% compared to the previous year. However, margins narrowed, and completions also fell, as expected due to the volatility mentioned.
Looking forward, completions are set to rise above previous levels. More excitingly for me, Vistry’s focus on affordable and social housing could really boost the firm. This is an area that the new Labour government is backing heavily.
Breaking down some fundamentals, the shares now trade on a price-to-earnings ratio of 15. This isn’t the cheapest, and perhaps some of the future growth is priced in already. However, I personally have no qualms paying a fair price for a solid business.
Finally, a dividend yield of 4.9% sweetens the investment case. Furthermore, a recent £55m share buy back is a positive. As is the £1bn the board has promised to distribute to shareholders across the next three years. However, it’s worth mentioning that dividends are never guaranteed.
From a bearish standpoint, my biggest concern is inflation rearing its ugly head once more, to cut into potentially improving margins. This could dent shareholder value moving forward. The other is if the economic situation worsens, interest rate cuts may not occur. I’ll be keeping a close eye on things.
