UK shares have been on a holding pattern since the start of 2023. Looking specifically at the FTSE 250, the UK’s second leading index is only down by around 2.1% over the last five months. And that’s despite many mid-cap companies experiencing significant volatility in current economic conditions.
Yet new predictions from the Economic Forecast Agency (EFA) show some interesting signs of a potential rebound. If these prove accurate, a new bull market may be on the horizon, giving investors the rare opportunity to capitalise on a stock market recovery.
That’s especially exciting since, historically, buying before a market recovery is a proven method for achieving substantial portfolio returns.
Interest rates
With inflation ravaging consumer wallets, the Bank of England (BoE), along with other central banks, has been steadily increasing interest rates. The goal is to deliberately slow economic activity to allow inflation to cool. Consequently, the rising LIBOR has been making debt increasingly expensive for companies.
As a quick reminder, the LIBOR, or London Interbank Offered Rate, is essentially the interest rate banks pay to each other when borrowing money. Most variable debt currently issued today is based on LIBOR, which rises and falls roughly in line with the hikes and cuts made by the BoE.
It currently stands at 5.48%. And according to the EFA, further expected interest rate hikes will push it to as high as 6.23% by September this year. Obviously, that suggests more economic slowdown over the coming months, which doesn’t bode well for UK shares.
However, that trend may quickly change after September. Why? Because current analyst forecasts predict that LIBOR will begin to steadily decline to just 2.7% by May 2025. This means interest rates are on track to drop substantially as monetary policy switches from contractionary to expansionary. And steadily falling interest rates are a classic characteristic of a bull market.
Nothing is certain
Forecasts help provide a rough picture of what to expect. But they’re seldom accurate. And while the thought of falling interest rates certainly sounds lovely, it won’t happen until inflation gets under control.
The latest figures from the Office for National Statistics do show inflation cooling. However, there’s still a long way to go. In the meantime, businesses riddled with debt are feeling the pressure of interest rate hikes. And even those that manage to survive could suffer from significant cracks in their balance sheets that could take years to repair.
Nevertheless, I’m cautiously optimistic that the worse has passed. And while the next couple of months will undoubtedly be trying, high-quality UK shares may be primed to surge thereafter. That’s why I’ve already begun drip-feeding new capital into my investment portfolio in preparation for what could be an explosive period of long-awaited gains.
