Image source: Getty Images
UK stocks have suffered due to high interest rates. In addition, strong inflation, although lower now than the highs of previous months, has not helped. Adding geopolitical issues to the mix, it's no wonder stock markets around the world have been disrupted.
Since the Bank of England (BoE) announced the first rate cut last month, I've been thinking about which sectors and stocks might benefit if they continue to do so.
Let me explain my thinking, and break down one option that I would buy if I had the money to spare right now.
Sectors I will watch
Personally, I believe that sectors such as real estate, home builders, and consumer goods will see the biggest benefit from the price drop.
Inflation, and lower rates can translate into more money in the pockets of consumers to spend. Inflation means less to pay for things like food, and lower interest rates may mean mortgage rates, or interest on mortgages, may decrease.
I understand that this is all theory at this point, and economic instability is not yet a thing of the past. However, green shoots of positivity in emerging economies, if you ask me.
Focusing on the housing sector, I think you are the biggest beneficiary of the price reduction. Inflation meant higher costs for the unfortunate margin. High interest rates meant that loans were less expensive, and sales fell. If construction costs and mortgage rates fall, foreclosures, sales, and new business may grow at new levels of income. Also, the real demand for housing is greater than the supply of housing, giving home builders an opportunity to grow the fund for years to come.
One option I like
The Vistry Group (LSE: VTY) shares have risen sharply in the past 12 months, up 70%. This time last year, they were trading at 785p, compared to current levels of 1,339p.
I think a large part of this increase has been good results, which look like a good balance, and exciting future prospects.
Sharing key takeaways from 2023 results, Vistry reported operating profit of £487.9m in 2023, up 8.2% on the previous year. However, margins are shrinking, and completions are also falling, as expected due to the aforementioned volatility.
Looking ahead, completions are set to rise above previous levels. What I am most excited about is that, Vistry's focus on affordable housing and social media can improve the company. This is an area that the new Labor government strongly supports.
Breaking out some fundamentals, shares now trade at 15 times earnings. This is not cheap, and perhaps some of the future growth is already priced. However, I personally have no qualms about paying a fair price for a solid business.
Finally, a dividend yield of 4.9% mitigates the investment case. In addition, the recent £55m share purchase is good. As much as £1bn the board has promised to distribute to shareholders over the next three years. However, it is worth mentioning that benefits are not guaranteed.
From a bearish perspective, my biggest concern is inflation rearing its ugly head again, to reduce the margins that may improve. This could be shareholder value decay going forward. Another is that if the economic situation worsens, interest rate cuts may not happen. I will be keeping a close eye on things.
Source link
