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UK stocks have suffered due to higher interest rates. In addition, runaway inflation, although currently down from the highs of previous months, has not helped. Add to this the geopolitical issues and it is no surprise that stock markets globally have been hurt.
As the Bank of England (BoE) announced its first rate cut last month, I've been thinking about which sectors and stocks might benefit if they continue to do so.
Let me explain my thoughts and break down an option I would love to buy if I had the money available right now.
Sectors I will be watching
Personally, I think that sectors such as real estate, home construction and consumer goods will benefit the most from falling rates.
Lower inflation and lower rates could translate into more spending money in consumers' pockets. Lower inflation means less money to spend on items like food, and lower interest rates could mean that mortgage prices, or interest rates on loans, could go down.
I understand that this is all theoretical for the moment and that economic turbulence is not yet a thing of the past. However, in my opinion, green shoots of economic positivity are emerging.
Focusing on the homebuilding sector, I believe it is the biggest potential beneficiary of rate cuts. Inflation caused higher material costs to squeeze margins. Higher interest rates made mortgages less affordable and sales slowed. If construction costs and mortgage interest rates come down, completions, sales and new business could drive new levels of revenue. In addition, the fact that demand for housing outstrips supply offers homebuilders the opportunity to pad their coffers over the next few years.
A choice I like
Vistry Group Shares in (LSE:VTY) have risen significantly over the past 12 months, by 70%. At this time last year, they were trading at 785p, compared to current levels of 1,339p.
I believe that much of this increase is due to impressive results, what appears to be a good balance sheet and exciting future prospects.
Vistry shared some key takeaways from its 2023 results: it reported an operating profit of £487.9m for 2023, up 8.2% compared to the previous year. However, margins were down and completions were also down, as expected due to the aforementioned volatility.
Looking ahead, completions are expected to exceed previous levels. What I find most exciting is that Vistry’s focus on social and affordable housing could really boost the company. This is an area that the new Labour government is strongly backing.
Looking at some fundamentals, the stock is now trading at a price-to-earnings ratio of 15. It's not the cheapest and perhaps some future growth is already priced in. However, I personally have no qualms about paying a fair price for a solid company.
Finally, a 4.9% dividend yield sweetens the investment. Additionally, a recent £55m share buyback is a welcome development, as is the £1bn the board has promised to distribute to shareholders over the next three years. It is worth mentioning, however, that dividends are never guaranteed.
From a bearish perspective, my biggest concern is that inflation will reappear and affect margins that could improve. This could affect shareholder value in the future. The other is that if the economic situation worsens, interest rate cuts may not happen. I will be keeping a close eye on the situation.
