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As a value investor, I am always looking for the best stocks to buy for my portfolio. That means looking to see if certain stocks are cheap. However, there are times when buying stocks makes sense because of historical trends or economic theory.
No recession, no worries
Although past performance does not guarantee future returns, I have found a surprising relationship between FTSE 100 stocks and interest rates. During the last five rate cut cycles, UK stocks have generally risen in the 12 months after the first rate cut. This pattern is particularly relevant now, as the Bank of England moves forward with rate cuts and the FTSE has boasted positive returns in four of the last five cycles, one year after the first rate cut.
UK stocks have shown remarkable resilience during previous downgrade cycles, with the FTSE 100 even posting impressive gains during the 1990-1991 recession. The headline index is up 22%+ in the year after the initial downgrade. However, British stocks are doing their best when recession is avoided. In fact, returns averaged 31.5% during the 1996-1997 and 1998-1999 rate cut cycles.
The successful ones in the field and their strengths
So, what areas should I focus on? Well, surprisingly, technology stocks lead the pack historically, with a one-year average return of 37.1% during bearish periods. Specifically, the FTSE 100 stalwarts like it RELX again Sage they often perform very well, as investors shift to growth stocks in lower-rated areas.
Bank stocks such as Lloyds (LSE:LLOY) is also another hot spot. The sector follows closely behind, averaging a 33% return. This stems from the bank’s ability to lock in higher yields with a property hedge while paying less interest to customers. Banks achieve this by investing in long-term bonds when rates are high, earning favorable returns, while lowering interest payments on customer savings accounts and deposits as rates fall, increasing their profit margins.
In addition, Lloyds’ large mortgage portfolio benefits from reduced default risks in a low interest rate environment. And with lower rates often stimulating lending activity, this often ends up leading to increased loan volumes and associated revenue. I own lloyds shares and am thinking of buying more.
Today’s investment climate
That said, choosing specific FTSE 100 stocks to buy is not necessarily easy, as past performance is not always an indicator of future performance. And the current situation is different from previous cycles. The UK market is now heavily dependent on China’s growth, is facing a stagnant cash flow, and is suffering from new government policies.
Still, compelling opportunities remain. Sectors such as banks and real estate developers will benefit from the rate cuts. Meanwhile, consumer discretionary companies such as Marks and Spencer continue to show more promise, as buyers tend to spend more when borrowing costs are cheaper. Also, I also saw comfort as there is potential for a resurgence in 2025 if China’s economy bounces back.
But what makes me so optimistic here is not just historical trends. And the fact that UK stocks continue to trade at lower prices than their US counterparts. This price gap, combined with historical patterns during price cuts, suggests that FTSE 100 stocks could deliver mid-to-high single-digit returns over the next 12 months, and I think stocks in the banking, technology, and consumer goods sectors could do well. that.
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