The Bank of England has recently cut interest rates by 0.25%. After a long period of high costs of borrowing, this could signal the beginning of a big change. Lower interest rates tend to support the stock market by stimulating economic activity. Therefore, is right now the time for me to load up on growth stocks?
The near-term future
Inflation has been troubling for the UK market in recent years. The cost of living crisis following the pandemic has been on everybody’s mind. However, the economy is showing signs of recovery from a shallow recession as inflation edges closer to the Bank of England’s target.
Despite the interest rate cuts that are expected in 2025 being positive for economic growth, this could cause further inflation. The reason for this is that as more money enters the economy from loans, demand increases, and companies raise their prices as a result.
Britain isn’t alone in this predicament. Markets are also feeling this tension in the US. Much of how the UK’s economy recovers will depend on how the Federal Reserve deals with interest rates and inflation in America. That’s because many of Britain’s top companies depend on the US economy for trade.
I expect a short-term rally
Even if the market reacts favourably to lower interest rates in 2025, I think this is only going to be a short-term gain. Given the past inflationary environment and potential future inflation, prices are likely to continue rising and reduce demand more severely than what’s currently being felt with high interest rates. Therefore, I think we could be on the precipice of a recession.
As a long-term investor, I’m being very careful about the shares I buy right now. It’s extremely important that I choose companies that offer good value. That will help to protect me from any severe downward momentum in a ‘bear’ market.
Looking for recession-resistance
One company that has been on my radar for a long time that I believe would continue to perform relatively well in a recession is Safestore (LSE:SAFE). This real estate investment trust offers storage units. People usually vacate these less than housing during severe economic downturns.
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The main metric I use to measure a real estate company’s valuation is the price-to-funds-from-operations ratio. In 2017, Safestore’s was at nearly 24. In 2021, it got as high as 45. Today, it’s a much more reasonable 20.5. Therefore, I think I’d be investing at a decent price. This is also true due to the fact that the company has a three-year-average annual revenue growth rate of 10%, compared to 7.6% as a 10-year median.
However, the company faces competition risks, including from its main rival Big Yellow Group. Depending on how the economy evolves, a future period of interest rate hikes from the Bank of England to curb long-term inflation means the company could be tested in how it manages expansion strategies and financing.
I’m holding off for now
Safestore looks well-positioned to me in the current uncertain economic environment. However, I reckon there are better places to invest my savings today. I’m looking to emerging markets for big growth opportunities. These are more protected from the macroeconomic risks currently building in the West.
The post Will the UK stock market soar in 2025 if interest rates are cut? appeared first on The Motley Fool UK.
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Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestore Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
