Why I’d buy cheap shares now before a massive market shift

Jon Smith outlines how a sharp fall in interest rates could be a catalyst for a market rally and why he’s buying cheap shares on that basis.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

2024 year number handwritten on a sandy beach at sunrise

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There’s an interesting theory floating around at the moment about how a large stock market rally could happen next year do to a sharp fall in interest rates. If this is the case, adding cheap shares to my portfolio now could be a good move.

Big change ahead?

Over the past 18 months, interest rates around the world have risen sharply. Here in the UK, the base rate has gone from 0.1% during the depths of the pandemic to 5.25% now. High interest rates aren’t usually a good thing for the stock market. This is because it increases the cost of debt for large corporations. Further, it raises the benchmark of expected returns for an investor. If a Cash ISA can offer 5%, this suddenly becomes the return that has to be beaten to justify investing in a stock.

Despite all of this, the FTSE 100 has managed to push to fresh all-time highs earlier this year. This shows that fundamentally there’s growth potential.

The idea for a large reversal in sentiment hinges on a drop in global interest rates in 2024. The drop in inflation in the UK to 4.6% could be continued early next year. If it gets down to the target level of 2%, I’d expect the Bank of England committee to start cutting interest rates.

The benefits to the market

This would ease pressure on consumers and businesses alike. Given how quickly the base rate moved higher, I don’t think it’s out of the question for a quick fall down to 3% or 3.5% over the next year. This is what I believe would be the catalyst for pushing the FTSE 100 significantly higher.

It would also likely coincide with a spurt in economic growth, a stronger property market and higher disposable income.

The risk to this view for the UK would be political uncertainty via the general election, which is possibly due in H2 2024.

The action plan

Should this be the case, it makes sense for me to buy cheap shares now. Some would argue that “a rising tide lifts all boats” and that it’s easier to simply buy a FTSE 100 tracker fund.

I disagree. I’d rather be selective and buy cheap individual shares for a few reasons. To begin with, I’d much rather own a stock with a low valuation for the long term. If my view is wrong for next year and I buy an expensive stock, I could be left holding it for a long time without seeing any share price gains.

Further, if my view is correct, it’s the cheap shares that stand to gain the most. As investors pile in, the scope for an undervalued firm to rally is much more than a stock that’s already trading at 52-week highs.

On that basis, I’m filtering for stocks at 52-week lows with a price-to-earnings ratio below 10. This should provide me with a good list that I can then drill down into further.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing For Beginners

Pink 3D image of the numbers '2025' growing in size
Investing Articles

After returning 101% in 2024 is this FTSE bank the best share to buy for 2025?

FTSE 100 bank NatWest Group turned out to be the best share to buy at the start of this year.…

Read more »

Investing Articles

Here’s how to cut a coffee a day and invest in 2 stocks a month to aim for a £65k second income

Millions of us would love a second income, but it’s easier to achieve than we may realise. Dr James Fox…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Here’s what an investor would have after buying 2024’s top 5 FTSE 100 stocks in a £20k ISA

Harvey Jones sadly doesn't hold any of this year's five biggest FTSE 100 winners. But even his portfolio of more…

Read more »

Investing Articles

3 ISA strategies to consider for 2025

It's nearly New Year. And after that, ISA deadline time will start creeping up on us. It can pay to…

Read more »

Investing Articles

I’m ready for a stock market crash in 2025

Our writer highlights a high-quality FTSE 100 share that he'll buy instantly if the stock market has a major meltdown…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

£5k in savings? Here’s a passive income ISA plan to consider

Interest rates from some cash investments might look good for passive income right now. But for the long term, I…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

2 FTSE 100 stocks with major red flags I’m avoiding for 2025

Jon Smith talks through a couple of FTSE 100 shares that he believes could underperform the broader index in the…

Read more »

Investing Articles

Can the stock market bull run continue in 2025? Here’s what the experts say

After a strong run for the stock market many investors are looking forward to further success next year. Harvey Jones…

Read more »