The main chatter so far today (16 October) has been the surprise fall in UK inflation. The September reading came in at 1.7%, below the 1.9% forecast and a sharp drop from the 2.2% in the previous month. Naturally, the stock market has jumped as a result, but there are some key UK shares that I think will lead the charge from here.
My thinking on where to focus
Before I get to specific shares, it’s important to show my workings (like my maths teacher always used to tell me). Economic theory tells me that raising interest rates acts to lower inflation. Since the end of the pandemic, interest rates have been jacked up to over 5%. Inflation since then has fallen and is now down below the 2% target from the central bank.
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This should allow faster-than-expected rate cuts going forward. This should help to stimulate demand in the UK, as corporates can borrow money at a cheaper price and consumers have less of an incentive to save rather than spend.
Therefore, the main areas of the stock market that I expect to benefit the most are ones that either directly interact with consumers or ones that rely in some way on debt or borrowings.
The property market
To this end, it doesn’t surprise me that some of the top gainers in the FTSE 100 so far today are from the property sector. This includes Barratt Redrow (LSE:BTRW), Taylor Wimpey and Persimmon.
Barratt Redrow is the top performer, up almost 3% today, so let’s focus there. The stock has now gained 16% over the past year. For those not familiar, the company is a recent merger between two homebuilders, Barratt Developments and Redrow. As a new powerhouse, I expect the group to be able to save a good chunk on costs, as many duplicated resources can be cut. Further, it should be able to use the best parts and processes from each firm, enabling the overall company to be more profitable.
Yet the main reason why I’m thinking about adding this stock to my diversified portfolio relates to the potential interest rate cuts. Lower rates should feed through to lower mortgage prices. This in turn should help the group to sell more homes, as more people can afford to get a mortgage. Further, higher demand should help to increase property prices, meaning that the company makes more revenue.
As a risk, I have seen cases in the past where two companies have come together and the result is a disaster! Therefore, only time will tell if things do work out smoothly. If they don’t then it could get messy.
My game plan
Aside from the homebuilders, I also see consumer discretionary stocks doing well. If people feel more confident about the economy and the cash in their pocket, they are more likely to spend on luxury items.
For the moment, I’m going to build a watchlist from the relevant sectors and then look to invest in the coming weeks before the Bank of England November meeting.
