During December, the biggest topic of conversation I had with my friends who invest in the market was about interest rate cuts. Given that inflation is now falling closer to the 2% target level and the fact that other central banks (like the US Fed) are actively considering cuts, I think it’s likely to happen this year. Here are some of the FTSE shares that I believe could benefit the most from this.
Cheaper borrowing costs
One area that I think could outperform is real estate investment trusts (REITs). These are funds that manage large amounts of commercial or residential properties. The aim is that a retail investor can get a slice of the pie with even a small investment amount. The income from renting out the properties is paid out via dividends.
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If interest rates fall next year, it should help REITs in several ways. It makes borrowing cheaper, allowing the trust managers to buy new property at a more affordable level. Lower rates also ease pressure on businesses and consumers alike. This should create more demand for renting out properties or signing longer leases, both of which would be a boost for REITs.
One point to note is that it might take some time for the rate cuts to filter through to the above benefits. It’s not like the day after a rate cut everyone would be full of optimism. So the stocks might be delayed in seeing any potential rally.
Also, investors need to be aware that even though the shares could jump, the larger benefit could be through higher dividend payments.
I’m keeping an eye on the Triple Point Social Housing REIT and the Impact Healthcare REIT.
Plugging in to the right audience
Another area that could do well is investment management firms. I feel the sharp rise in interest rates has made many more people conscious of what they are doing with their money. Leaving it in a current account these days isn’t the best option for many.
Now that people are engaged, rate cuts could see more of them make use of investment companies and retail platforms. This could see a pick up in transactional fees and assets under management for these type of businesses.
Granted, people might be uneasy about investing, especially if we see higher volatility. Let’s also not forget that 2024 is probably an election year, which again can cause a lot of uncertainty.
Yet on balance I still feel that lower interest rates will make people more focused on managing their money. A couple of stocks on my watchlist for this are Jupiter Fund Management and AJ Bell.
Managing expectations
There’s no guarantee that the Bank of England committee will decide to reduce interest rates this year. So I need to be realistic in how I invest. Yet I feel that it’s not a question of if rates fall, but rather when. I believe the ideas on my watchlist will be fruitful, when the right time comes.
