Financial and Property Stocks Gain on Rate Cut

FTSE 100 reached the highest level in one year following the Bank of England interest rate cut. Financial and property stocks were among the biggest gainers on the day

Karen Kwok 5 August, 2016 | 2:30PM
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UK stocks hit a one-year high on Friday after the Bank of England’s first interest rate cut in more than seven years.

Facing widespread economic concerns following the Brexit vote, the Bank of England on Thursday announced an interest rate cut to a new record low of 0.25%. The Bank also introduced a new quantitative easing programme: buying £60 billion of gilts and £10 billion of corporate bonds, as well as a new Term Funding Scheme to reinforce the effect of the other measures.  

The announcement pushed the FTSE 100 index up 1.7% at 6747.41 at its close on Thursday. The blue-chip index prolonged those gains on Friday, rising a further 0.3% to reach its highest level since July 2015. Sterling fell by 1% against the US dollar and the Euro. Andy Scott, economist at HiFX said the outlook for sterling after the Bank of England interest rate cuts remains negative.

Financial Stocks Among the Biggest Gainers

Financial and property stocks that suffered in the wake of the Brexit vote on June 24 gained some momentum on the day after the Bank of England revealed fresh stimulus measures. Financial insurer Aviva (AV.) led gains in FTSE 100, rising 7% on the day while financial services group Prudential (PRU) was up 3.5%. Another financial stock Old Mutual rose 3%. Banking stocks Standard Chartered (STAN) and HSBC (HSBA) gained 5.4% and 2.7% respectively.

Stepehn Ellis, director of financial services equity research at Morningstar said near term growth of Aviva will be limited, but he thinks the new-look Aviva will be a safer insurance company, heading to a new direction aimed at reviving insurance sales, reducing financial leverage and disposing of underperforming businesses. The company recently reduced dividends to shareholders and exited the US market in an effort to retain more cash. All of these efforts seem to have had a positive impact on the company's financials, with capital surplus more than doubling and cash remittances continuing to improve, Ellis said.

Low Rate Will Boost Property Market

The new record low interest rate lifted property stocks higher as the announcement boosted confidence in the UK property market.

“Long-term low interest rates have undoubtedly boosted demand in the property market, putting upward pressure on house prices. This new rate cut almost certainly won't send prices up, but it could certainly help to stabilise them,” said Ben madden, managing director of London estate agents Thorgills.

House prices declined by 1% between June and July, according to the July Halifax House Price Index. Prices in the three months to July were 8.4% higher than in the same three months of 2015 while house prices in May to July 2016 were 1.6% higher than in the preceding three months. The annual rate of growth was unchanged at 8.4%, the lowest since July 2015.

Martin Ellis, Halifax housing economist said these data suggested that house price growth is slowing while the current rates remain robust. However he admitted that it remained too early to determine if there has been any impact on the housing market as a result of June’s EU referendum result.

Mortgage approvals fell slight in June under the impact of higher stamp duty tax rates for buy to let and second home purchases in April. The volume of mortgage approvals for house purchases declined by 3% between May and June, data from Halifax showed. However, the introduction of new interest rate on Thursday should provide much needed confidence for those people considering getting on the property ladder, Peter Harrison, director of money at MoneySuperMarket, the price comparison website.

Share of real estate company Intu Properties (INTU) gained 3.6% on the day when the Bank of England introduced more stimulus plan. Housebuilder stocks also gained some momentum, Mid-day trading today sees Barratt Developments (BDEV) rising 2.2% to 435.5p and Taylor Wimpey (TW.) gaining 1.9% to 154p.

Commercial Property Benefits

Shares of commercial property company Berkeley Group Holdings (BKG) also rose 2.4% on the day and the stock extended those gains, rising 2.8% at 2654p at 12pm London time. Retail property specialist Kingfisher (KGF) gained 2.5% yesterday.

Miles Gibson, head of UK research at CBRE, the commercial property services adviser said: “From a commercial property perspective, this base rate cut will not have any big impact on pricing, which is driven by long term rates, although pricing might be boosted by a confidence effect from this cut.

“With sterling priced assets still looking attractive to overseas investors, whose cost of capital is not driven by UK debt markets, London and the UK most definitely remain a strong investment opportunity.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aviva PLC457.20 GBX-0.31Rating
Barratt Developments PLC432.90 GBX0.67Rating
Berkeley Group Holdings (The) PLC3,898.00 GBX-0.51Rating
HSBC Holdings PLC760.80 GBX-0.56Rating
Kingfisher PLC250.70 GBX0.48Rating
Prudential PLC628.40 GBX-0.22Rating
Standard Chartered PLC972.00 GBX-1.18Rating
Taylor Wimpey PLC122.15 GBX0.37Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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