In a rather surprising move on May 10, Mark Carney, Governor of the Bank of England (BOE) announced that interest rates would remain unchanged at 0.5%. In a unanimous decision, U.K.’s Monetary Policy Committee (MPC) voted 7-2 in favor of not raising the base rate at this time.
However, growing speculation among analysts that the BOE could wait till August to hike rates have kept investors on tenterhooks. Experts believe that the economy across the pond could stage a comeback in the second quarter, paving the way for a rate hike after that point.
Meanwhile, such developments have actually impacted the British pound, with the latter falling to $1.35 on May 10. However, such events bode well for the real estate and utility sectors. In fact, historical data suggests that whenever BOE has kept the rates unchanged, these sectors have performed well. This is therefore the right time to invest in real estate and utility stocks from Britain.
How Would Utility and Real Estate Stocks Benefit?
Keeping interest rates low would mean that investors would automatically start rotating out of government bonds to safer havens such as utilities and real estate. Further, Russ Mould, the investment director for AJ Bell, is of the opinion that that utilities would largely benefit because of the fact that it is viewed as a bond proxy.
Yield on UK's benchmark government bond, the 10-year gilt, is dependent largely on the course that interest rate policy takes. Any reticence in raising the base rate automatically make government bonds less attractive because investors would not be obtaining the expected returns from such investments. Consequently, on May 10, the 10-year gilt yield fell to 1.42%.
Meanwhile, low interest rates would also boost real estate development and the overall demand for new construction increases in a low-rate environment. Further, real estate investment trusts also witness a surge in profits because borrowing costs are lower. This means, investments in REITs fetch higher dividends as opposed to government bonds.
Rate Hike in August Unlikely?
Per a report published on Bloomberg on May 16, the majority of economists predict a hike in the base rate in August, when U.K.’s central bank next meets. They reasoned that the economy would likely bounce back in the second quarter of this year.
However, per the BOE’s growth outlook, the economy would cool down in 2018. The overall output would fall to 1.4% this year from 1.8% in 2017. Therefore, a rate hike is highly unlikely even in August.
4 Safe Choices
An environment of low interest rates within the British economy has historically been beneficial for the real estate and utility stocks. Moreover, chances of a future rate hike appear bleak because BOE’s growth outlook for the British economy has been reduced from 2017. Such circumstances make investing in real estate and utility stocks from Britain a prudent decision.
In this context, we have selected four stocks that are expected to gain from these factors. These four stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SSE plc (SSEZY - Free Report) is a distributor and supplier of electricity and gas across the United Kingdom.
The company is based out of Perth. The expected earnings growth rate for the current year is 19.03%. The Zacks Consensus Estimate for the current year has improved 6.5% over the past 60 days. SSE has gained 8.3% over the six months.
British Land Company Plc (BTLCY - Free Report) is a real estate investment trust which owns, manages, finances and develops commercial properties.
The company is based out of London. The expected earnings growth rate for the current year is 1%. The Zacks Consensus Estimate for the current year has improved 2% over the past 60 days. British Land Company has gained 16.7% over the past six months.
Land Securities Group plc (LSGOF - Free Report) is the owner and operator of a real estate company. It manages a vast portfolio of office buildings, shopping and leisure destinations.
The company is based out of London and has a Zacks Rank #2. The expected earnings growth rate for the current year is 4.6%. The Zacks Consensus Estimate for the current year has improved 5.3% over the past 60 days. Land Securities Group has gained 6.6% over the past six months.
Shaftesbury PLC (SHABF - Free Report) is a provider of property investment services. It manages a vast portfolio of retail shops, restaurants, cafes, bars, residential properties and offices.
The company is based out of London. The expected earnings growth rate for the current year is 25.58%. The Zacks Consensus Estimate for the current year has improved 8% over the past 60 days. Shaftesbury has gained 5.6% over the past six months.
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