FTSE stocks are a favourite among value investors. Having underperformed for years, many UK stocks trade at discounted valuations, promising outsized returns. And with the UK in an interest rate-cutting cycle, this could be the year when those promises are realised.
Falling rates, rising stocks
UK stocks typically gain in the first year after rate-cutting cycles begin, with notable exceptions being the dot-com bust and the initial period after the Global Financial Crisis. UK stock returns averaged 31.5% during the 1996-1997 and 1998-1999 rate-cutting cycles, while the FTSE 100 delivered returns in excess of 22% in 1990-1991. Essentially, this tells us that stocks gain during rate-cutting cycles when recessions are avoided.
However, investors need to remember that past performance is no guarantee of future success. And while many investors struggle to beat the market, certain stocks may perform better than others due to a myriad of factors. Nonetheless, there’s a sense that falling interest rates coupled with low valuations could trigger a rally.
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Where are the winners?
The market never lifts equally. I think several sectors are likely to outperform when the Bank of England cuts interest rates. Housebuilders and construction companies, such as Persimmon, typically benefit as lower mortgage rates stimulate demand.
Meanwhile, consumer discretionary stocks, including retailers and hospitality firms, often see gains due to increased consumer spending power. This may see companies like Currys make gains, while retailers like DFS Furniture may be lifted by a confluence of factors, including more movement in the housing market.
Surprisingly, banks can be beneficiaries of falling interest rates as well. UK mortgage-oriented banks like Lloyds will likely see an expansion of their loan books as demand for home funding rises. Typically, falling rates also makes mortgage more affordable, improving bad loan rates. And when it comes to net interest rates, well many people often overlook the importance of hedging strategies.
One to watch?
I feel Rightmove (LSE:RMV) could stand out as a key beneficiary of falling UK interest rates. Lower rates typically stimulate housing market activity by reducing mortgage costs, encouraging homebuying and selling. As the UK’s leading property portal, Rightmove benefits directly from increased property listings and heightened buyer activity, driving demand for its advertising services.
With a dominant market share and scalable business model, the company’s well-positioned to capitalise on any housing market recovery. However, it’s certainly worth noting that this near-monopoly position could be challenged in 2025 with the emergence of OnTheMarket, recently acquired by CoStar Group.
However, its low operational costs and strong cash generation provide resilience, allowing it to weather economic uncertainties. As such, investors seeking exposure to the housing market without direct risk to property prices may find Rightmove an attractive option to consider.
