The stocks best placed to benefit from interest rate cuts

NatWest Group (LSE:NWG), Saga (LSE:SAGA) and Barratt Redrow (LSE:BTRW) are among the top picks after a City bank this week selected the stocks it regards as well placed for an interest rate cutting cycle.

Berenberg economists expect the Bank of England’s policy rate to fall from 3.75% to 3% in mid-2027 as the central bank tightens its focus on stabilising the labour market.

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That’s in contrast to the wider market, which is still pricing in two Bank of England rate hikes in the next 12 months. The next policy meeting concludes on Thursday 30 July, when a no-change decision is forecast and will be accompanied by updated projections for growth and inflation.

UBS agrees that the next move by the Bank’s Monetary Policy Committee (MPC) could be a cut, with the City institution seeing February and April next year as possible dates.

It said: “Even in a scenario in which the MPC were to hike rates, the weaker starting point for the economy would, in our view, imply a relatively rapid reversal via rate cuts thereafter.

“So, while we do not rule out BoE rate hikes, we continue to see them as a risk scenario rather than the base case.”

Berenberg said its economists’ expectations presented an opportunity to look at mispriced domestic cyclicals that offer healthy total shareholder returns with strong fundamentals.

It added: “This rate-cut cycle is unlikely to radically reshape the market dynamics that have driven returns in UK equities, so we would hesitate with carte blanche exposure to domestic cyclicals.

“Our two preferred ways to take cyclical exposure are travel and leisure, and construction and housebuilders.”

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It is also positive on UK banks and the broader financial sector as it does not view a lower-rate environment as a significant headwind, particularly given the size and duration of the structural hedges used by lenders to smooth out interest rate volatility.

The bank points out that long-term interest rates are still likely to remain at a higher level than the rolling average yields of the UK banks’ structural hedge books, meaning that earnings would still grow materially over the next two years.

It has a price target on NatWest shares of 860p for an upside of more than 25% on today’s price.

The bank adds that any headwind from potential lower short-term interest rates could be offset by a combination of cyclical bounce-back in loan demand and more benign asset quality.

Elsewhere in financial services, Berenberg believes IntegraFin Holdings (LSE:IHP) should continue to benefit from the growing demand for financial advice in the UK.

The FTSE 250 stock, which provides financial planning tools alongside a range of investments and tax-efficient wrappers, is backed with a Buy recommendation and price target of 460p.

Having held a neutral view on Barratt Redrow for several years, Berenberg recently upgraded its rating to Buy with a price target of 348p. The stock traded at 292.5p on Thursday afternoon.

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While the trading outlook remains challenging, Berenberg said the housebuilder looked attractive when considering its low tangible net asset value, strong balance sheet and scope for capital returns.

It added: “If the UK economy is to recover faster than expected with lower-than-expected financing costs, we view Barratt Redrow as very well positioned to benefit from this scenario, which could result in a faster-than-expected recovery in both volumes and margins, both of which are at depressed levels.”

The other pick of the construction and housebuilders is kitchens supplier Howden Joinery Group (LSE:HWDN), which is backed with a price target of 1,075p.

In travel and leisure, Berenberg said UK rate cuts would contribute to materially lower interest costs for the over 50s holidays and insurance business Saga.

While the company has deleveraged materially in recent years, it notes that its leverage ratio of net debt to underlying earnings is still more than three times.

On the demand side, it said a lower-rate environment supported the value of its customers’ housing and investment assets and should feed through into wealth and spending confidence.

It added: “Long term, we are bullish on Saga’s growth potential, which together with improvements in cash conversion should accelerate deleveraging and bring shareholder returns back into view.”

The bank has a price target of 1,025p, which compares with today’s 643p and the 264p seen at the start of December. The other recommendation in the sector is bowling centre operator Hollywood Bowl Group (LSE:BOWL), whose customer base is weighted towards families and younger adults.

The bank said: “Lower rates ease mortgage and consumer credit costs for this cohort, directly supporting demand for discretionary, lower-ticket leisure spend like bowling.” A target of 450p compares with today’s price for the FTSE 250-listed stock of 282.5p.