With the US Federal Reserve announcing a further $10 billion reduction in its monthly asset repurchase programme, markets were looking for a positive statement surrounding the accommodative monetary policy that has been a feature of the last few years.
Janet Yellen, Chair of the Federal Reserve, said that the US economy is making continued progress, but that interest rates would remain at historic lows until after the monthly asset repurchase programme had come to an end.
As the performance of stock markets across Europe has shown, this is music to the ears of investors. That’s because low interest rates mean more stimulus for the economy – and for longer. With the FTSE 100 up just under 1% at the time of writing, here are five stocks that could benefit from further stock market strength in future months as a result of them having high betas (which simply means how sensitive they are to movements in the wider market).
Barclays
With a beta of 1.4, Barclays (LSE: BARC) should (in theory) move by 1.4% for every 1% move in the FTSE 100. Clearly, if the market rises then Barclays should benefit more than the average FTSE 100 constituent. Furthermore, Barclays looks great value at current levels, with shares currently trading on a price to earnings (P/E) ratio of just 10. This compares very favourably to the FTSE 100’s P/E of 14.2 and, in addition, Barclays is expected to deliver double digit earnings growth next year.
ARM
The UK-based technology firm, ARM (LSE: ARM), has not performed well thus far in 2014, being down 18% while the FTSE 100 is up 1%. With a beta of 1.5, ARM could benefit from further rises in the wider market and continues to offer investors extremely strong growth prospects. Indeed, earnings per share (EPS) are forecast to increase by 14% this year and 22% next year – well above the mid-single digit average of the FTSE 100.
GKN
The engineering firm, GKN (LSE: GKN) is set to post a fall in EPS in 2014 for the first time in five years, although the company is forecast to bounce back in 2015 with double-digit growth. With a beta of 1.5, GKN could be a major beneficiary of stock market strength due to low interest rates and, with its shares having had a rather muted first half of 2014 (down 1%), now could be a good time to take a position in the company. Trading on a P/E of just 13.1, it looks good value.
Travis Perkins
Travis Perkins (LSE: TPK) currently has a beta of 1.6 and is a highly cyclical stock. This means that it is extremely sensitive to the economic and business cycles. Indeed, with the Federal Reserve stating that interest rates are set to remain low for some time, it could provide a boost to the US and world economies and, in turn, this could allow Travis Perkins to deliver strong performance in future. With EPS growth of 14% forecast for this year and 16% forecast for next year, Travis Perkins could prove to be a very attractive growth stock.
Persimmon
The highest beta stock among the five, Persimmon’s (LSE: PSN) beta of 1.7 is among the highest in the index. Certainly, there has been much discussion surrounding the overheating of the UK housing market but, with the economy seemingly moving from strength to strength, demand for property could continue to outstrip supply over the medium to long term. Having recovered from a challenging period during the credit crunch, Persimmon is now highly profitable and trades on a P/E of just 10.9. Furthermore, it is expected to yield around 6.2% in 2014.
