The FTSE 100 nears 8,000 points! I don’t think these UK shares will stay cheap for long

Jon Smith explains why the stock market has been rallying this week after central bank meetings, and flags UK shares that could benefit.

| More on:
Arrow symbol glowing amid black arrow symbols on black background.

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.

The FTSE 100 has enjoyed a stellar week and is up several hundred points. At 7,950 points, it’s closing in on the psychologically key 8,000 barrier.

Given the drivers behind this move, I think that a more sustained market rally could be seen in coming months. This gives me a kick in the backside to buy some cheap UK shares before time runs out.

Why the market is rising

One of the main factors that helped the market this week was key central bank meetings. On Wednesday (20 March), the US Federal Reserve strongly hinted that interest rate cuts are coming this year.

This pushed the US stock market higher. This acted to help different stock markets around the world jump too, including here in the UK.

Following this, the Bank of England met and struck a similar tone. No one from the committee voted for a rate hike, with comments from the governor suggesting that rate cuts in the late summer are due.

This is positive for stocks in general, further helping to push the FTSE 100 and FTSE 250 up. The lead index did briefly trade above 8,000 in February last year. It appears that we could be due another visit above 8,000 points soon.

Where to target

Now is the time for me to think about the main shares that should benefit from lower interest rates. After all, if we do see rate cuts in coming months, these are the stocks likely to outperform.

A good place for me to delve into is growth stocks with higher debt levels than more mature companies. Debt is often taken on to help fuel further growth and expansion. Yet high interest rates makes it more expensive to service existing debt and take on fresh loans. Therefore, if rates get cut, this eases pressure here. It should help to lower costs for the firm and boost cash flow.

One firm on my mind

An example of a stock I’d consider is Ocado Group (LSE:OCDO). The stock might be up 11% over the past year, but it’s down a whopping 76% over the past three years.

I’ve had a very mixed relationship with the stock in the past, but feel it does tick the boxes for what I’m looking for right now. One of the struggles it has endured in the past is the weight of debt. This is still elevated, with a debt-to-equity ratio of 1.32 (above the level of 1 that is seen as comfortable). Yet I don’t feel the business is drowning in debt for this to be a material risk. As a result, lower interest rates could help the firm here.

As for growth, Ocado could do very well if interest rates get cut due to higher consumer demand. Remember that rates would be reduced because inflation is continuing to fall.

High inflation in the grocery space was one point that was flagged up by Ocado as putting significant pressure on earnings last year. The reversal of this should have the opposite impact.

Given the long-term discount the Ocado share price trades at, I think it’s a cheap option and I’m considering putting in a small amount of money.

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 recommended Ocado Group Plc. 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 Growth Shares

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Investing Articles

Does a 30% price drop make YouGov one of the best AIM shares to buy now?

The YouGov share price has fallen by nearly a third in two months. So, does it now make it on…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Billionaire Warren Buffet has 43% of his Berkshire portfolio in Apple stock!

Christopher Ruane looks at some pros and cons of Warren Buffett's biggest holding, and explains why he won't be buying…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Even at £5+, BP’s share price still looks around 50% undervalued against its peers to me

BP’s share price still looks very undervalued to me, given its strong core business and more pragmatic energy transition strategy.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

Down 27%, but set for major growth, this hidden FTSE gem looks cheap to me

This powerhouse FTSE stock has embarked on a new growth strategy that’s already showing good results, but it looks undervalued…

Read more »

Investing Articles

Is the Rolls-Royce share price running out of steam?

The Rolls-Royce share price has enjoyed a remarkable rally since late 2022, but there are fears that further positive potential…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

2 shares I’d avoid like the plague in this stock market!

The stock market can be a dangerous place, especially for unwary or inexperienced investors. Here are two stocks I'd never…

Read more »