Rising inflation poses a big challenge to investors buying and holding FTSE 100 shares. With prices tipped to keep rising — September CPI is widely tipped at 4%, up from 3.8% last month — the Bank of England (BoE) is taking a more measured approach to interest rate cuts.
Bank governor Andrew Bailey said on Thursday (18 September) that he expects “some further reductions” but that “the timing and scale of those is more uncertain now.” The BoE’s rate-setting committee chose to keep its benchmark rate locked by seven votes to two earlier in the day.
Policymakers seem to be taking a more measured approach to future cuts, which poses problems for many UK shares by, for instance, dampening business and consumer spending and pushing up borrowing costs.
But this doesn’t mean investors should temper their investing plans. Here are two Footsie stocks to consider in the current environment.
HSBC
Banks like HSBC (LSE:HSBA) can score a net positive from higher interest rates.
On the downside, elevated rates can dampen financial product demand and result in greater loan impairments. But crucially, they also provide a boost to retail banks’ net interest margins (NIMs).
These are a key measure of profitability that gauge the difference betweeen the interest banks pay to savers and what they charge borrowers.
This doesn’t necessarily make UK-focused banks like Lloyds strong buys though, given the weak outlook for the domestic economy. But it gives the outlook for HSBC, which has significant operations in Britain and exposure to another 56 international markets, an extra shot in the arm.
I like this particular FTSE 100 bank because of its large exposure to fast-growing Asian economies. This provides greater long-term share price and dividend potential in my book.
City analysts are expecting HSBC’s earnings to rise 9% in 2025 and by a further 4% next year.
Unilever
Consumer goods manufacturers like Unilever (LSE:ULVR) can also be effective lifeboats when interest rates are higher.
These companies plough huge amounts of money into marketing their wares. This can be a drag on earnings, as can investment in product innovation (which sometimes don’t work out and come at huge cost).
But while these actions are ongoing risks, they may also make the brand portfolio more desirable and can support demand even when consumers feel the pinch. Substantial brand power also allows manufacturers to effectively hike prices to offset cost increases.
Encouragingly, Unilever boasts some of the world’s most popular brands including Axe deodorant, Hellmann’s mayonnaise, Sunsilk shampoo and Comfort fabric conditioner. This makes it worth particular attention in my view. A whopping 3.4bn people use one of its products every day.
This mini list also illustrates Unilever’s focus on defensive segments like food, personal care, beauty and home care. This provides sales with added stability over time.
Like HSBC, the company also sells its products worldwide, thus limiting exposure to the UK and BoE policy. In total, it sells its products in 190 countries.
Accordingly, City brokers think the FTSE 100 company’s earnings will rise 30% year on year in 2025. Another 5% rise is tipped for 2026.
