Over the past year, different FTSE indexes have rallied. For example, the FTSE 100 is up 7.8% over this period. There are many reasons that have gone into the move higher, but there’s one key one that I believe could help UK stocks outperform in the coming couple of years, therefore making it a potentially golden time for me to buy now.
A shift in policy
The important factor I’m talking about is the start of monetary policy easing. Put another way, the Bank of England (BoE) has started cutting interest rates. Last month, the committee decided to reduce the base rate from 5.25% to 5%, its first cut since early 2020.
They also signalled that the path going forward would be one of lower rates. Many economists are expecting another rate cut before the end of this year. This is because inflation is now back under control and close to the BoE’s target level of 2%.
Cutting interest rates helps to stimulate demand, as it gives consumers more of a reason to spend rather than save. As such, periods of monetary policy easing are typically good for economic growth and therefore for the stock market. FTSE stocks should feel the benefit of higher demand from investors that are more optimisitc about the future.
Given that we have just begun the easing cycle, I think it’s a unique opportunity that only really comes around once a decade or so to buy stocks that should benefit in the coming years.
A contender that could outperform
Even though I expect the broad market to do well, some specific stocks could outperform. One example that I’m thinking about buying is British Land (LSE:BLND). The real-estate investment trust owns a host of commercial property that’s mostly focused on London campuses, retail parks, and urban logistic centres.
Over the past year, the stock is up 39%, in part fuelled by expectation of interest rate cuts. This helps the trust because lower rates should stimulate demand for tenants to want to lease sites. Further, it reduces the cost of debt, which the business has to take on with new projects. In the latest results, the loan-to-value ratio was 34.6% of the portfolio. So a reduction in the cost of servicing the debt on this should enable to trust to be more profitable. In turn, this should be reflected in higher dividend payments, boosting the existing 5.13% dividend yield.
As financing becomes more affordable for others, property prices should rally. This should act to increase the net asset value (NAV) of the portfolio.
One risk is that the strong share price rally might already reflect all this good news for the future. With the price-to-earnings ratio now at 15.5, it’s above my benchmark figure of 10 that I think represents fair value. Even with this being the case though, I’m still thinking about adding it to my existing portfolio.
