Many value-focused investors will be turning their attention to the FTSE 250 in 2025. This index, representing mid-cap companies, often shows heightened sensitivity to domestic economic policies, including interest rate adjustments. It could be a year of opportunity on the mid-cap index.
Interest rates have started falling
Stocks typically perform well when the Bank of England cuts interest rates. And the rebound is even more pronounced when a recession is avoided. In fact, returns on UK equities averaged 31.5% during the 1996-1997 and 1998-1999 rate-cutting cycles — both times recessions when were avoided.
Intriguingly, the FTSE 250 has often outperformed the FTSE 100 during rate-cutting cycles, particularly in the early 1990s and early 2000s. That’s interesting to me, especially when the FTSE 250 has marginally underperformed the FTSE 100 over the past 12 months.
Moreover, recent analyses suggest that during rate-cutting cycles, FTSE 250 companies are projected to deliver higher earnings growth compared to their large-cap counterparts in the FTSE 100. For instance, in 2025, FTSE 250 earnings are forecasted to grow by over 18%, surpassing the 9% growth anticipated for FTSE 100 companies. That’s according to research from abrdn.
Sector winners
While past performance is no guarantee of future success, it’s certainly interesting and informative to gain a better understanding of these relationships. Banking stocks are one sector that has typically benefitted from rate cutting cycles. Lower borrowing costs typically spur higher lending rates, which can help grow the loan book and increase long-term prospects. Investors may therefore want to take a closer look at lenders like OSB Group — specialising in residential and buy-to-let mortgages — or even Close Brothers Group.
In theory, consumer-facing businesses such as retail should be given a boost by falling interest rates. Of course, factors such as consumer confidence and employment matter too. Frasers Group — owner of Sports Direct — Watches of Switzerland, and Currys all offer different positioning in the retail sector.
Several catalysts
Investors could consider Ocado (LSE:OCDO) shares in a falling rate environment. Growth-oriented companies often benefit from lower borrowing costs and an improved risk appetite.
There are several possible catalysts here. Firstly, Ocado’s advanced automation and technology platform could attract more partnerships and investments as financing becomes cheaper. Additionally, while Ocado’s main business lies in providing technology to global grocery retailers, lower rates might boost consumer spending, potentially driving higher-end grocery sales. This could indirectly benefit Ocado through its retail joint venture with Marks & Spencer.
Investors should note that Ocado’s valuation is heavily reliant on long-term growth projections, making it sensitive to broader market sentiment. Investors should approach this former FTSE 100 company with caution even as the stock pushes to new lows. Careful evaluation of Ocado’s evolving financial health and strategic direction is essential.
