The Bank of England met today (20 June), and while the committee decided not to cut interest rates now, there are strong indications that cuts are coming shortly. As a result, the FTSE 100 jumped following the announcement. I think this could be the start of a broader rally in the index, for a few key reasons.
Key information from today
At the meeting today the vote was split 7-2, which means that a couple of members voted for a cut, but not enough for a majority. However, the accompanying statement noted that the decision not to cut was “finely balanced” for some. In my view, this shows me that there were several other members that were close to voting for lowering rates.
In that case, it would almost be a majority and so I think we could see the first cut in August. The FTSE 100 jumped as other investors are starting to factor in cuts this year based on the information today.
The move higher also coincides with the release of May inflation data earlier this week. Inflation is now back at 2%, the target level for the Bank of England. This will ease pressures on businesses, with costs not spiralling higher. I believe this should help to boost profit margins over the coming year.
With inflation back on target and interest rates likely moving lower later this summer, I think the reaction in the stock market is the correct one.
Where the value is right now
The FTSE 100 contains companies from a variety of different sectors. Not all have reacted in the same way to the central bank announcement. Therefore, my focus is on the stocks that could really benefit from a sustained rally.
One example I like is Land Securities Group (LSE:LAND). It doesn’t surprise me that it’s the second best performer today in the index, up 3%.
The group is the largest commercial property company in the UK and has a wide range of tenants. Naturally, when it looks to buy a new site, it has to fund this with some debt. The 2023 results showed a loan-to-value ratio of 35%. So when it borrows this money, the interest rate payable is very important.
With interest rates due to fall, this lowers the cost of funding for the company. Given that the portfolio is currently worth just under £10bn, even a small decrease in the debt cost can make a large monetary difference.
The stock is up 5% already this year, but it’s still a way off the 52-week highs. This makes me think that there is room to run higher, especially on further positive headlines about lower rates.
As a risk, the business is currently loss-making. The pre-tax loss last year was £341m. This was a smaller loss than 2022, but I understand why some investors will shy away from investing in a company that isn’t profitable right now.
A positive runway
I think the momentum from the meeting today will carry on. As a result, I’m thinking about adding Landsec to my portfolio shortly.
