What the Bank of England Rate Cut Means for UK Equities

“It
means
that
monetary
policy
will
become
relatively
more
stimulative
which
is
good
for
equities,”
he
tells
Morningstar
UK.
 

Overseas
earnings
for
the
UK’s
largest
companies
complicate
the
outlook
though.

“The
UK
stock
market
is
driven
80%
by
earnings
offshore.
So,
there
is
a
weak
link
between
UK
interest
rates
and
the
earnings
of
the
UK
stock
market. It
is
much
more
of
a
company
specific
question,
and
while
there
are
some
domestic
plays
its
direct
link
with
the
UK
stock
market
is
not
that
strong.” 

Housing
Stocks
Already
Up

One
obvious
stock
sector
to
benefit
from
expected
and
actual
interest
rate
cuts
is
housing.
Large
listed
housebuilders
like
Persimmon
(PSN)
have
already
risen
in
value
this
year
on
anticipated
rate
cuts,
which
make
mortgages
more
affordable
for
consumers
and
lowers
debt
costs
for
companies.
Falling
inflation
and
an
improving
economy
have
also
boosted
the
prospects
for
the
key
housing
sector,
with
recent
surveys
showing
a
recovery
in
prices.

Laura
Foll,
portfolio
manager
at
Janus
Henderson,
and
manager
of
Henderson
Opportunities
Trust
(HOT),
Lowland
Investment
Company
(LWI)
and Janus
Henderson
UK
Equity
Income
and
Growth, believes
that
the
UK’s
housing
sector
will
be
one
of
the
principal
beneficiaries
of
the
cut
despite
the
modest
reaction
on
Thursday.

“[The
cut]
means
that
people’s
mortgage
rates
are
likely
to
come
down
modestly,
and
that
will
probably
stimulate
demand
again
in
a
modest
way.
If
you
are
a
house
builder
and
you
are
deciding
what
housing
volumes
to
build
you
cannot
suddenly
just
build
more
houses.
You
must
put
things
in
the
pipeline,”
Foll
says.
 

“If
you
see
demand
coming
back
in
a
more
meaningful
way
you
are
probably
more
likely
to
accelerate
those
plans
to
build
more
houses.
That
then
has
a
knock-on
impact
for
the
building
material
sector
as
well”

Abby
Glennie,
Abrdn’s
deputy
head
of
smaller
companies
and
the
lead
manager
of
the

Gold-Rated
Abrdn
UK
Smaller
Companies
Institutional
Income
Fund,
also
believes
that
wider
sector
stocks
away
from
the
housebuilders
will
reap
the
rewards
of
the
cut,
backing
estate
agent
Savills
(SVS)
and
broker
the
Mortgage
Advice
Bureau
(MAB1)
.
 

Lower
Interest
Rates:
Yet
Another
Boost?

Despite
the
boost
to
property
stocks,
Glennie
sees
the
interest
rate
cut
as
an
additional
welcome
stimulant
for
UK
equities,
which
had
already
posted
record
highs
this
year
(see
chart
of
the
Morningstar
UK
index).
For
her
it’s
“another
tick
in
the
box”
for
an
improved
outlook
for
domestic
stocks,
which
include
economic
growth,
a
new
government,
M&A
interest.

“We
often
get
asked
by
clients:
do
you
need
interest
rate
cuts
for
UK
markets
to
be
positive?
I
think
it’s
helpful,
it
is
a
catalyst,
but
it
is
not
necessary.
The
UK
markets
can
still
do
well
without
a
rate
cutting
cycle.”

“The
best
evidence
of
that
is
if
you
look
at
markets
since
October,
small
and
mid-caps
have
been
good
in
that
period
and
not
only
did
we
not
have
rate
cuts
but
expectations
of
those
were
pushed
out.”

Glennie
points
to
attractive
UK
equity
valuation
levels,
the
improved
economic
cycle,
M&A
activity,
as
well
as
a
change
in
government
as
factors
that
have
contributed
to
a
more
positive
outlook
for
UK
stocks.
 

“The
interest
rate
cutting
cycle
is
another
tick
in
the
box.
The
political
stability
point
has
been
a
real
negative
in
terms
of
the
perception
of
the
UK.
But
you
can
look
at
other
regions
in
the
world
where
you
have
political
question
marks
and
the
UK
looks
more
settled,
and
what
the
market
tends
to
like
is
stability.”

What
Other
Sectors
Could
Benefit
or
Struggle?

For
Hugh
Gimber, global
market
strategist
at
J.P.
Morgan
Asset
Management,
the
key
rationale
behind
the
interest
rate
is
the
progress
the
UK
has
made
on
inflation. 

“With
economic
momentum
picking
up
and
consumer
confidence
rebounding
as
the
cost
of
living
crisis
fades,”
he
says.

Against
this
backdrop,
Gimber
believes
that
hospitality
and
leisure
stocks
will
also
be
beneficiaries
of
lower
rates,
if
consumers
have
more
money
in
their
pockets.

“However,
if
economic
momentum
starts
to
wane
as
we
move
later
in
the
cutting
cycle,
equity
market
leadership
will
likely
shift
again,
with
more
traditional
‘bond
proxy’
sectors
like
utilities
and
consumer
staples
coming
to
the
fore.”

Kathleen
Brooks,
research
director
at
XTB,
believes
that
domestically
focused
stocks
in
the
midcap
FTSE
250
will
see
a
boost.

“Most
of
that
index
is
very
leveraged
to
the
real
economy.
We
have
seen
increases
in
consumer
discretionary
stocks.
Although
the
FTSE
250
is
falling,
the
consumer
discretionary
sector
is
holding
up
as
well
as
real
estate.
These
are
the
two
sectors
most
linked
to
interest
rates,”
she
says.
 

She
points
to
the
higher
economic
forecast
from
the
Bank
of
England
as
evidence
that
the
UK
economy
is
recovering
after
falling
into
recession
last
year.

She
also
believes
that
a
run
of
rate
cuts
could
financials
in
a
tricky
position.
Barclays
(BARC)
was
one
of
the
fallers
on
Thursday,
despite
a
strong
share
price
performance
in
2024
so
far.

“We
did
see
Barclays
come
out
upgrading
their
estimate
for
net
interest
income,
and
that
could
be
hit
going
forward
by
falling
interest
rates. The
fact
that
the
Bank
of
England
revised
down
their
rate
expectations
for
the
next
two
years
is
not
great
for
the
financial
sector,”
Brooks
says.  

Lower
interest
rates
reduce
banks’
net
interest
income,
a
key
metric
for
the
sector.
UK
bank
stock
prices
have
performed
well
this
year
as
interest
rate
cuts
have
been
deferred
because
of
“sticky”
inflation.
Markets
have
recalibrated
their
expectation
that
rates
will
not
fall
back
rapidly
to
pandemic
levels
but
will
be
“higher
for
longer”.
This
has
supported
financial
stocks
in
the
US,
eurozone
and
UK,
but
could
start
to
reverse
as
monetary
policy
gets
looser.

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