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UK stocks gain an average 21.9% in the 12 months following a first base rate cut

Journalist: John Choong (Head of Markets and Research), Newspage

ended 04. September 2024

Investors in UK stocks may be set for a windfall over the next 12 months if history is any indicator. Research done by Newspage shows that UK equities tend to gain a median average of 21.9% in the 12 months following the first rate cut.

The Bank of England usually cuts interest rates to avoid a recession (if one isn’t already in motion) and/or to stimulate economic growth. Since 1990, there have been five rate-cutting cycles that have cumulated in 1% worth of cuts, or more. These were in 1990, 1996, 1998, 2001, and 2007. Excluding the 2008 financial crisis, median average returns across the other four periods were positive.

With the UK now on track to be the strongest-performing G7 economy in 2024 with an annualised GDP growth rate of 2.6%, the odds of FTSE shares outperforming over the next 12 months are even greater. Newspage found that excluding years that had a recession or financial bubble “popping”, UK stocks produced a median average return of 22.9%, a year after the first rate cut was instigated, with all sectors posting positive returns.

Unsurprisingly, tech stocks are the biggest winners, with tech names 76.1% higher on average, in the year after the first rate cut. This is followed by banks, which yield an average return of 60.2% due to more favourable borrowing conditions, and then telecoms, with an average return of 57.5%.

On the flip side, however, there are several sectors that underperform. Consumer staples, for one, only scrape by with an average return of 0.4%, with utilities not doing much better either, with an average return of 5.1%. Meanwhile, consumer cyclical stocks post an average 14.3% return, but that still pales in comparison to the average return of the rest of the other sectors.

Newspage asked analysts, economists, and experts for their views of what this means for the outlook of the FTSE 100, the reasons behind their calls, and the reliability of historical trends.

5 responses from the Newspage community

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Editor
Wes Wilkes
CEO at IronMarket Wealth
Can we rule, Britannia?

With the recent flash PMIs showing an improvement in activity, the UK has been a surprising bright spot in the global economy, with activity data surprising to the upside at a time when it's pretty much disappearing elsewhere.

A key driver is an expectation of a strong consumer recovery, and whilst higher borrowing costs will weigh on spending power in the near term, we think this could be offset by rising real incomes as pay growth out-paces inflation.

Our analysis shows potential for upside surprises over the next couple of quarters. Therefore, we believe that consumer-focused stocks could well be the ones to lead this charge.
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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
The FTSE's stiff upper lip may finally be cracking a smile as the BoE prepares to loosen its monetary stranglehold further. This should set UK stocks up for a remarkable run over the next 12 months. Economic headwinds are abating, and with a series of rate cuts expected in early 2025, this could end an agonising few years for investors.

Analysis of previous cutting cycles indicates that markets have historically surged following the first rate cut. However, while historical trends provide a compelling narrative, they must be viewed in the context of our era’s unique macroeconomic challenges. Past performance may not be as reliable a guide today, with investors best served exploring sector-specific opportunities which traditionally thrive in a low-rate environment, such as infrastructure, small-caps, and housing.

Therefore, although UK investors can cautiously hope that history repeats itself, they should keep a watchful eye on the unique factors that could rewrite the rulebook.
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Guy Myles
CEO at Flying Colours
UK assets are set to perform well in the coming year due to a blend of cheap valuations, good economic performance, supportive monetary policies, and renewed political stability.

After being previously undervalued, international investors have started to appreciate the attractiveness of UK assets.

The UK's economic growth has remained robust despite rising interest rates, with consumer spending holding strong. As interest rates begin to decline, interest rate-sensitive sectors are likely to benefit, creating an attractive scenario for investors.

Moreover, political risk has declined thanks to the Labour Party's substantial majority.
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Pierre-Olivier Essig
Head of Research at Air Capital
Over the past five years, UK stocks have underperformed every other European peer except Norway, Finland, and Belgium. However, with new political stability, fiscal discipline, and a commitment to rebuilding the economy, the UK is poised to regain some of the ground it lost since Brexit.

The services sector accounts for 72% of GDP, while manufacturing makes up 16%. To thrive, the UK needs more industrial development in regional capitals like Manchester, Birmingham, and Leeds, as well as better infrastructure (think Swiss trains!).

We expect the FTSE 100 to increase by 20% from current levels within the next 12 months.

With some sectors in Europe slowly reaching their peak levels (tech, media, banks, insurance, property), we believe investors will favour high dividend yields, low valuations, and quality at attractive prices in sectors such as telecoms, food & beverage, consumer discretionary, energy, and basic resources, which have significantly underperformed over the past year.
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Platinum
John Choong
Head of Equities and Markets at Interpretiv
With the UK’s strong GDP growth and the US and EU also avoiding recession, UK stocks are poised for further gains, especially given their relatively cheap valuations compared to their US counterparts.

The "big five" FTSE 100 banks may already be up by an average 34% this year, but we believe they are likely to keep climbing, as rising lending volumes and lower impairments should drive profits higher despite margin declines.

However, sectors like telecoms and mining face challenges, and may not be able to replicate the success they had in the 90s. That’s because the telecoms sector is in a completely different position today, while miners continue to face headwinds from the contraction in Chinese and global manufacturing activity.

As such, investors should critically assess their portfolios and not solely rely on historical trends. Rate cuts may not always lead to further share price growth, especially if valuations are already stretched or growth expectations are already priced in.