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Interest rate cut: the potential stock market winners and losers 

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Written by: Adam Lewis
04/08/2016
While those with cash saving accounts may be cursing today’s historic interest rate cut, AJ Bell says the move by the Bank of England is likely to be welcomed by equity investors.

According to AJ Bell investment director Russ Mould, history shows that interest rate cuts can boost stock prices, with markets having jumped over 8% in the six months following previous cuts in rates since 1970.

“There is already a desperate hunt for income and a further reduction in bank savings rate will do nothing to help this,” says Mould. “So the outcome may be that we see no pick-up in economic growth with people looking for an alternative home for their savings rather than spending more.”

While Mould says stock markets are likely to welcome today’s rate cut in the short-term, with sterling a possible “sacrificial lamb”, as ever he notes there will be winners and losers.

The potential market winners

With a weak pound already boosting the countries exporters and those companies with large overseas earnings – such as miners, oil, pharmaceuticals, aerospace and defence and consumer staple – Mould says they will be likely gainers following the further monetary policy easing.

He adds: “Another area to watch may be consumer discretionary names, such as media stocks, where the market has been pricing in an economic slowdown and a drop in advertising revenue. Names to watch here include ITV and Sky. Housebuilders and property stocks may also bounce in the view the Bank of England is pro-actively trying to stave off a possible downturn.

“Stocks capable of offering a decent dividend yield which is well covered by earnings and cash flow could also fare well, as lower interest rates and bond yields make the quest for income more acute for many investors. Potential names to watch include RELX, BAE Systems, Sky and BAT as well as utilities, such as SSE and National Grid. They may not offer the highest yields but they offer well-covered ones which should prove reliable.”

The potential market losers

Mould says the obvious losers are those companies which have already suffered owing to the low interest rate environment, namely the banks and insurers, as net interest margins could be under pressure at the former, while at the latter the ability to generate sufficient investment returns to cover their future liabilities comes under question.

He adds: “While general retailers could benefit if lower rates stimulate more consumer spending, the weaker pound could increase purchasing costs and raw materials are also likely to become more expensive for airlines (in the form of oil), once their hedges wear off and assuming the pound stays weak.”

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