Interest rates are one of the most important macroeconomic factors for stocks like those on the FTSE 100. When borrowing is cheaper, it costs less to invest in a business. This means lower rates often have the knock-on effect of more economic growth, larger dividends, and increased share prices.
The Bank of England didn’t cut rates on 6 November. The decision was a close-run thing, with five votes one way and four votes the other. But as I write, the markets are pricing in an 86% chance of a cut on 18 December, probably from 4% to 3.75%. And because the inflation target is 2%, that may be the start of a decreasing base rate. Perhaps that will be the start of a very good time for the Footsie.
Here are three FTSE 100 stocks I think are set to benefit if rates are indeed cut in December and beyond.
Cheaper borrowing
One of the most prominent consequences of cheaper borrowing is cheaper loans. This could prove vital to housebuilders like Barratt Redrow. The current slump in the housing market is partially down to the higher cost of taking out a mortgage.
A rates cut wouldn’t solve other issues dogging the sector at present, like increasing supply costs and higher taxes. That Barratt Redrow is down in one of the best years for the FTSE 100 this millennium tells its own story. As such, I won’t be buying the shares for my portfolio.
Another consequence of lower rates is a weaker pound. That’s because the currency is less attractive when rates are lower.
While this is an issue for net importers, it’s something of a boon for many of the international FTSE 100 stocks. A firm like oil major Shell (which draws 87% of sales from outside these shores) may welcome a weaker currency.
Disposable income
A third area to keep an eye on is domestic-focused retail companies. JD Sports (LSE: JDS) fits the bill here, selling its sporting goods up and down the country with around half of its revenues drawn from within these shores.
Why do lower rates help retail stocks? Because cheaper loans and borrowing mean more disposable income.
There’s a rather large caveat here, however, and that’s the Autumn Budget. As I write, big tax rises are expected (although the pain of an income tax might be swerved). This could negate the effect of reduced rates. A direct tax will lower disposable income, which could have been spent on clothes, trainers, and the like.
Down 63% from a high in 2021 and trading at a price-to-earnings ratio of just 8.6, JD Sports has plenty of scope for a good turnaround buy in my view. It could be one for investors to consider.
