According to the International Monetary Fund (IMF), interest rates in the UK are set to fall once inflation starts to come down. If they’re right, this could be a once-in-a-decade opportunity to buy UK stocks.
Interest rates in the UK are currently at the highest they’ve been in 14 years and that’s a significant drag on economic growth. A return to pre-pandemic levels would make a lot of today’s share prices look cheap.
When will interest rates fall
The IMF didn’t forecast exactly when interest rates would start to fall. But it likely depends on when inflation starts to get somewhere near the Bank of England’s stated 2% target.
At the moment, it’s nowhere close. Inflation in the UK is currently at 10.4% and the most recent reading had the rate of price increases rising, rather than getting closer to the BoE’s target.
The BoE is expecting inflation to fall sharply this summer, though. If they’re right about this, then interest rates could start coming down sooner rather than later.
Before the pandemic, interest rates were at 0.75%. A return to those levels – or anywhere close – would make some of the stock prices on offer today look extremely attractive.
Growth stocks
Growth stocks are the best example of this. Rising interest rates has been a significant obstacle for businesses like Halma, which trades at a price-to-earnings (P/E) ratio of 38.
That implies an earnings yield of 2.6%. With savers able to get 3.2% on their cash, a company like Halma needs to grow its earnings significantly to be investable at today’s prices.
I’m not saying it can’t do this – the business has grown impressively over the last decade. But the equation becomes much clearer if interest rates fall to the point that savers again struggle to earn much more than 1% on their cash.
At that price, a growing return of 2.6% looks like a great opportunity. So I expect the price of Halma’s shares to rise if interest rates fall, as it looks increasingly attractive for investors looking to build wealth.
Passive income opportunities
Something similar is true of Unilever shares. The company’s strong brands and massive scale in a sector that typically enjoys steady demand make it a favourite among investors looking for passive income.
At today’s prices, the stock comes with a dividend of around 3.5%. With instant access accounts currently offering up to 3.2% on cash savings, there’s a real question of whether the extra reward is worth the risk.
But if interest rates fall back to their pre-pandemic levels and UK savers struggle to earn much above 1%, I think a 3.5% dividend looks much more attractive by comparison.
As a result, I suspect investors looking for dividend income are likely to be drawn to Unilever’s shares if interest rates fall significantly. If I’m right about that, then the share price is going to rise.
Time to buy stocks
If the IMF is right, then interest rates are the highest they’re going to be for some time. That means share prices are facing a once-in-a-decade headwind.
If that’s right, there are opportunities for both growth and dividend investors. As a result, I’m looking closely at UK stocks for what could be a rare opportunity.
