The FTSE 100 has enjoyed a stellar week and is up several hundred points. At 7,950 points, it’s closing in on the psychologically key 8,000 barrier.
Given the drivers behind this move, I think that a more sustained market rally could be seen in coming months. This gives me a kick in the backside to buy some cheap UK shares before time runs out.
Why the market is rising
One of the main factors that helped the market this week was key central bank meetings. On Wednesday (20 March), the US Federal Reserve strongly hinted that interest rate cuts are coming this year.
This pushed the US stock market higher. This acted to help different stock markets around the world jump too, including here in the UK.
Following this, the Bank of England met and struck a similar tone. No one from the committee voted for a rate hike, with comments from the governor suggesting that rate cuts in the late summer are due.
This is positive for stocks in general, further helping to push the FTSE 100 and FTSE 250 up. The lead index did briefly trade above 8,000 in February last year. It appears that we could be due another visit above 8,000 points soon.
Where to target
Now is the time for me to think about the main shares that should benefit from lower interest rates. After all, if we do see rate cuts in coming months, these are the stocks likely to outperform.
A good place for me to delve into is growth stocks with higher debt levels than more mature companies. Debt is often taken on to help fuel further growth and expansion. Yet high interest rates makes it more expensive to service existing debt and take on fresh loans. Therefore, if rates get cut, this eases pressure here. It should help to lower costs for the firm and boost cash flow.
One firm on my mind
An example of a stock I’d consider is Ocado Group (LSE:OCDO). The stock might be up 11% over the past year, but it’s down a whopping 76% over the past three years.
I’ve had a very mixed relationship with the stock in the past, but feel it does tick the boxes for what I’m looking for right now. One of the struggles it has endured in the past is the weight of debt. This is still elevated, with a debt-to-equity ratio of 1.32 (above the level of 1 that is seen as comfortable). Yet I don’t feel the business is drowning in debt for this to be a material risk. As a result, lower interest rates could help the firm here.
As for growth, Ocado could do very well if interest rates get cut due to higher consumer demand. Remember that rates would be reduced because inflation is continuing to fall.
High inflation in the grocery space was one point that was flagged up by Ocado as putting significant pressure on earnings last year. The reversal of this should have the opposite impact.
Given the long-term discount the Ocado share price trades at, I think it’s a cheap option and I’m considering putting in a small amount of money.
