Image source: Getty Images
Bank of England Governor Andrew Bailey recently stated: “we are on our way” to see the long-awaited first drop in interest rates in the UK. This has prompted me to scan the market for growth stocks that are likely to benefit based on what has happened following past rate cuts.
No guarantees
Now, this is not a foolproof strategy. Most investors quickly learn that history cannot guarantee anything when it comes to profitability. In fact, every fund manager in the country must regularly remind their clients of this.
However, this does not mean that looking back has no value.
As Voltaire once wrote: “History never repeats itself. The man always does it.” And by looking at what investors were clamoring for when interest rates previously fell, we can get an idea of what can happen from here.
At the very least, it's a decent first step in the stock-picking process.
Ready for recovery
One that has risen like a phoenix from the ashes in the past is the consumer discretionary sector. As debt becomes easier to manage, people tend to increase their spending on life's small luxuries. This often leads to improvements in profits for companies in this sector.
Pretty much everything related to property tends to do well too. As mortgage deals become more competitive, real estate market activity generally increases. That's good for builders, agents and suppliers.
technology companies, especially those that rely on external funding, may also see a surge in popularity. Again, lower interest rates reduce the cost of borrowing and make it easier to develop new products.
<h2 class="wp-block-heading" id="h-top-growth-stocks“>Top Growth stocks
Based on the above, it's not difficult to find some growth stocks whose share prices could skyrocket.
As terrible as the recent performance has been, I remain optimistic about the luxury goods retailer's medium- and long-term prospects. Burberry. The growing prosperity of the middle class (especially in Asian markets), combined with the desire to show status, should lead to a recovery in the company's fortunes.
UK housebuilders could also benefit from renewed buyer interest. And with the long-term need for quality housing in the UK as strong as ever, I suspect companies like Khaki We still have a lot of room to grow.
I'm also optimistic about technology. Scottish Mortgage Investment Trust. I am already the largest holding in my stocks and Shares ISA, and have been adding to my position in the first quarter of 2024. If some of your unlisted holdings show a desire to join the market as interest rates fall , the nearly 10% increase seen in price over the last month could be just the beginning.
Stay patient
Analysts and commentators have been speculating for many months about the precise timing of the first rate drop. And yet, we are still waiting.
Clearly, further delays could affect confidence in the stock I mentioned above. And since I don't have a crystal ball, I won't add my two cents here.
Instead, I'm concentrating on taking advantage of my £20,000 use-it-or-lose-it ISA allowance before the end of the current tax year (April 5) and shopping regularly in preparation for when rates are reduced.
As long as I can separate the wheat from the chaff and not meddle later, I think it will be worth being patient for long-term benefits.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice.
