As central banks start shifting towards potential interest rate cuts, investors are looking for opportunities in a changing economic landscape.
On Thursday, the Bank of England cut UK interest rates to 5%. If markets are right, a US rate cut is coming in September.
Lower interest rates are broadly good news for stock markets and the economy, and some companies are more directly impacted than others. But if this year is anything to go by, trying to predict the timing of rate cuts is almost impossible.
At times like this, investors should focus on what they can control – building a diversified portfolio that can benefit in a range of environments.
Here are three shares that could benefit from lower interest rates.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
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Paragon
Paragon is a specialist in the UK banking sector. Over 85% of the loan book is buy-to-let mortgages in the private rental market. That’s been a tough market to operate in lately. Landlords have seen profits come under pressure from higher mortgage rates.
There’s also been increasing regulation and changes to tax rules with the potential for more to come.
For Paragon, that meant less demand for its mortgage products, and new business saw a big drop-off in the past couple of years. But despite the challenges, Paragon has still managed to outperform the market, and shifting dynamics mean there’s hope for improved demand going forward.
One of these hopes is lower interest rates.
If buy-to-let mortgages are less expensive, the economics make much more sense from the landlord’s perspective.
The second shift is around the makeup of the landlords themselves.
Higher-risk amateur landlords have been pushed out of the market, and long-term professionals with bigger portfolios are taking more of a share. That’s an area of the market Paragon is geared towards.
Paragon has specific strengths in its market and looks well-placed to benefit from higher loan growth as rates come down.
However, lower rates can be a double-edged sword for banks, and there will likely be a hit to net interest margins (the profitability of lending vs borrowing) if rates come down.
Salesforce
Salesforce is a giant in the world of customer relationship management and cloud-based business solutions. The software as a service (SaaS) market has been on a downturn in recent years, triggered by the rapid rise in interest rates and slowing economic activity.
Companies have had to get their house in order, and that’s meant ordering new software packages hasn’t been a top priority.
The impact is clear, with sales growth now trending around the 10% mark compared to the mid-20s from a few years ago.
It’s also undergone some of its own rightsizing. Costs are in a much better place and the benefits are being felt in both profit and cash flow.
It might be the case that the sales slump has bottomed out. For now, businesses are still being selective and the outlook from Salesforce itself has been downbeat.
But rate cuts could re-ignite sales growth. As and when borrowing costs come back down, businesses should have more wiggle room to start spending on software again.
Salesforce is a clear leader in its field with growth levers still to pull, especially in the AI space. There’s also scope for falling rates to act as a tailwind, but top-line growth needs to reaccelerate before sentiment can move higher.
Tritax Big Box REIT
Tritax Big Box generates income by renting out warehouses, central to modern logistics and e-commerce. As a UK-focused developer and corporate landlord, Tritax is more exposed to the UK interest rate environment than most.
The past few years of rising interest rates has increased the cost of borrowing, making it more expensive for Tritax to finance new acquisitions.
There’s also been pressure on the value of its portfolio. Higher rates tend to lower the value of investments that generate long-term cash flows, like investment properties.
But those trends are starting to ease. And if rates are cut, there could be better conditions on the way. Plus, the 4.6% prospective forward dividend yield will look more attractive. Although remember, no returns are guaranteed.
Tritax, being a real estate investment trust, has to pay most of its rental income to investors. Expansion comes from selling mature assets to invest in development opportunities, or raising new capital from debt or equity markets. With asset values stabilised, sales are back underway, helping Tritax fund its essential development projects.
The valuation has already improved recently. But we think there’s room for further upside which could present an attractive entry point for those willing to ride short-term uncertainty. Sticky UK service inflation is a key risk to the interest rate outlook.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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