Lower interest rates are likely to boost UK stocks again this year. Trading activity will provide shareholders with a healthy salary. And at least one of the UK’s lagging listed stocks will make a big comeback. The FTSE 100 index could even hit another stock market all-time high.
At least that’s the theory.
It’s difficult to predict. As of the end of 2023, there were few, if any, fund house investment previews discussing President Donald Trump’s possible second term in the White House. This is a reminder that the truth can be unpleasant and that the future is uncertain. Nevertheless, patient investors can benefit if things continue as they are. The UK is a good place to start.
Is the UK an attractive place to invest?
Morningstar Investment Management’s 2025 outlook also states this. He argues that current valuations in the US look expensive and that better opportunities may lie elsewhere. Investors looking for quality bargains would do well to consider British house builders in their portfolio.
“Based on our bottom-up valuation model, European stocks are trading at around a 5% discount in absolute terms. While not cheap compared to where the market has traded over the past few years, it is not expensive either,” the report begins.
“The relative picture becomes even more compelling as Europe, and the UK in particular, has become the most attractive developed market region in the world, coupled with rising gross domestic product (GDP) and falling inflation. , with the addition of macroeconomic tailwinds from lower interest rates, things look even brighter.
House builders such as Barratt Redrow BTRW, Berkeley Group Holdings BKG and Persimmon PSN remain solid choices. The companies’ stocks have weathered a tough year, with Barratt down 21%, Barclays down about 20% and Persimmon down about 14%. But its current valuation looks attractive, according to Morningstar metrics.
“British housebuilders have been through a rough patch, at one point losing two-thirds of their value from the lockdown highs of 2021, and while shares have risen over the past year, stocks in the sector are still up to 50 We believe there is potential for a % increase.”
“Lower interest rates mean more affordable mortgages are available and government support policies should help pave the way in 2025.”
How much will the Bank of England cut interest rates in 2025?
At the end of 2023, many commentators expected the Bank of England to cut rates massively in 2024. There will only be two rate cuts by the end of this year, in August and November.
Michael Strobeck, global chief investment officer at Lombard Odier, and Dr. Nanette Heckler-Faiderbe, head of investment strategy for sustainability and research at Lombard Odier, agree that UK GDP growth is in line with expectations. If inflation continues to ease, monetary policy will be as follows: Policy should support higher valuations.
“We expect UK growth to be slightly higher in 2025 and inflation to be slightly above target, and the revised fiscal rules will provide further fiscal flexibility.”
“However, a more moderate inflation path should allow the Bank of England to cut rates more broadly than the market expected.”
As political commentators all pointed out after the Labor government’s first Budget in October, much depends on economic growth. The government expects GDP to jump from 1.1% in 2024 to 2% in 2025.
But the government, particularly the Office for Budget Responsibility, has been wrong before. The lack of accurate labor market data for the UK, and the further postponement announced just last week, will do little to allay skeptics. On December 4, Bank of England Governor Andrew Bailey told the FT that he expected four rate cuts in 2024, which was higher than market expectations.
Will the FTSE 100 look different in 2025?
It’s all political. But politics will play a key role in 2024, and may play a similar role next year.
In 2024, a review of the listing regime will change the way companies list in the UK. This policy is a legacy from the Rishi Sunak era, but will be perfected by the Starmer government. It is designed to make it easier for companies to go public and, as a result, investors to earn profits.
Until 2024, companies listed in London needed a “premium” listing to qualify for inclusion in the FTSE index. The new category “Stock Commercial Companies” (ESCC), created in July, merges the Premium and Standard Listing categories. This increases the likelihood that more companies will be included in the top tier of the UK stock market. Companies that previously had only a “standard” listing are now in the “transition” category and must apply to switch to the ESCC.
This change could change the look of the FTSE 100 and 250.
Oxford Nanopore ONT and Coca-Cola Europe Partners CCEP have already made breakthroughs, but THG THG emerged in 2021 and has endured abysmal performance since then, but is expected to remain in business “by March 2025 at the latest.” We aim to confirm the transfer. Even more people may do so this year. If you own a passive FTSE tracker fund or exchange-traded fund that mimics UK market movements, they will automatically buy new constituent stocks. This process is worth paying attention to.
Meanwhile, the FTSE restructuring just before the Christmas break saw three stocks promoted to the FTSE 100. So as 2025 begins, the blue-chip index will look different.
Which companies will IPO in 2025?
And speaking of new constituents, investors are eager for an exciting initial public offering (IPO) to bring energy back to the London market. One fund manager predicts the UK’s ‘IPO drought’ will end in 2025, but don’t get your hopes up.
Fast fashion brand Shine, already the subject of criticism and ethical concerns due to supply chain issues, is likely to go public this year. In late November, Financial Conduct Authority CEO Nikhil Rati, himself a former chief executive of the London Stock Exchange, appeared to give companies like Floating Shayne the green light. Ta.
Investors may not even have to wait until this year to see a decent IPO. But there’s a catch.
Canal+, the film and television production group to be spun off from Vivendi VIV, was listed on the London Stock Exchange on 16 December. Its £6.7bn valuation would normally mean it would be listed on the FTSE 100, but that is not possible because the IPO prospectus says so. We do not follow UK takeover norms. That means investors looking for large-cap FTSE 100 volatile stocks will need to look elsewhere.
They may be looking for a while. Revolut chief executive Nick Stronsky said a London listing did not “make sense” given the liquidity of the market and the taxes on share purchases. It’s also possible that Klarna, the buy now, pay later app that is popular among young people and has raised eyebrows, may reject London in favor of New York.
Will lagging UK stocks recover?
And when it comes to laggards, there were quite a few in 2024. Burberry BRBY dropped from the FTSE 100 in late August, and Aston Martin Lagonda’s AML turnaround plan stalled in late September. Kingfisher KGF had a strong first three quarters, but the owners of B&Q and Screwfix were unable to accurately deliver fourth-quarter results and have now lowered their Morningstar fair value estimate as a result. Masu.
Ocado shares will struggle in 2024
Source: Morningstar Direct
And then there’s Ocado OCDO, a technology-enabled online supermarket. The company fell on the FTSE 100 last year, with its share price falling by nearly 60% to just over £3. This is a far cry from the share price of £28.08 during the pandemic in February 2021. The company’s valuation is bad news for current investors, but a potential buying opportunity for patient new entrants. The company is currently significantly undervalued, according to Morningstar analysts.
But as the ride experienced by STJ investors at St James’s Place proves, a reversal is possible. Shares in the UK’s biggest asset manager lost more than half of its value after it was forced out by the FCA over its business practices last year, but this year it has seen growth in assets under management and cost-cutting plans. He made a remarkable comeback. It impressed investors. SJP’s share price rose 30% in 2024, and the company joined the FTSE 100 at the end of the year. No one had it on their 2024 bingo list.
St. James Place stock price rises
Source: Morningstar Direct
UK M&A is back
Mergers and acquisitions activity returned to London in 2024, with Hargreaves Lansdowne HL HL. This is one of the most notable private equity deals. The same could happen in 2025, especially if distressed stocks like Burberry BRBY and Dr. Martens DOCS attract the attention of bargain-hungry consolidators.
Aviva AV. We ultimately approached Direct Line DLG and accepted an offer from a major insurance group. Burberry is reportedly already the target of at least one bid from Moncler. If valuations remain depressed across the UK market and dividends fail to alleviate them, it will only encourage investors to seek value in other ways.
All in all, it’s definitely going to be a busy year. Will the FTSE 100 surpass its May 2024 high of 8,445.80 in 2025? We’ll have to wait to find out.
The author owns no shares in any securities mentioned in this article. Learn about Morningstar’s editorial policy.
