Lloyds Bank shares among inflation-data winners
A surprise decline in the monthly inflation figure has triggered a wave of optimism among UK stocks, but some have done better than others. City writer Graeme Evans names the best performers.
15th January 2025 14:08
by Graeme Evans from interactive investor
A dose of economic cheer today eased the new year hangover for Marks & Spencer Group (LSE:MKS) investors and led to a rare session of outperformance by Lloyds Banking Group (LSE:LLOY).
Other UK assets in demand included those in property and utilities as this morning’s positive inflation surprise of 2.5% boosted hopes of a February interest rate cut by the Bank of England.
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The FTSE 250 index, which generates about 45% of its revenues in the UK, bounced back over the 20,000 threshold and the FTSE 100 index shook off expectations for a flat performance.
The buying offset a tough start to the year for UK investors after a mix of global and domestic factors weakened sterling to a 14-month low and fuelled long-term borrowing costs.
In the retail sector, the outlook for Budget-related wage hikes and the potential impact of these changes on consumer demand have overshadowed robust festive trading reports.
One of the biggest casualties has been Marks & Spencer, which has followed 2024’s strong share price performance by falling 15% year-to-date despite a strong Christmas performance.
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Shares are back where they were in September although they showed signs of life today by rallying 8.5p to 336.1p as the best performer in the FTSE 100 retail sector.
Economic bellwether stock Lloyds Banking Group was boosted by today’s developments after the UK’s largest consumer lender rose 1.9p to 55.5p.
The shares are up 25% in the past year, but uncertainty over the compensation bill facing the motor finance provider means this performance pales against the 85% rise for NatWest Group (LSE:NWG).
Housebuilders led the FTSE 100 as today’s inflation print lifted hopes that the recent uptick in mortgage pricing on the back of bond market volatility could reverse.
Overnight index swap markets reduced their year-end bets for the Bank of England bank rate from last night’s 4.42% to 4.18%, implying two cuts this year. The next meeting takes place on 6 February, with today’s downside miss on inflation boosting hopes of a cut to 4.5%.
Having fallen sharply since the Budget in late October, Taylor Wimpey (LSE:TW.) shares today rallied by 4.15p to 113.25p and Barratt Redrow (LSE:BTRW) lifted 12.8p to 415.6p.
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Persimmon (LSE:PSN) put on another 36.5p to 1150.5p, having boosted confidence yesterday through a better-than-expected year-end update. Peel Hunt said recent heavy selling and the company’s relative strength left the stock at an attractive entry point.
It highlighted a price target of 1,300p: “We believe the fundamentals of the UK housing market continue to be attractive, with a continued demand/supply imbalance, and overall housing affordability that remains manageable.”
Today’s inflation reading eased stagflation worries, although the relief may be short-lived if firms opt to pass higher national insurance contributions more strongly to prices and the UK’s economic downturn continues in 2025. December’s GDP figure is due for release tomorrow.
Peel Hunt economist Kallum Pickering said: “If the cause of the softer momentum in prices during December is that a sudden drop-off in demand has sapped firms’ pricing power, the risk to watch now is that incoming data on the real economy surprise to the downside.
“Although we remain cautiously optimistic in our economic outlook for the UK, risks remain tilted to the downside near-term.”
Potential respite from higher debt costs also lifted stocks across the utility sector as Severn Trent (LSE:SVT) rose 68p to 2406p and United Utilities Group Class A (LSE:UU.) added 25.6p to 963.2p.
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Higher-for-longer interest rates have continued to diminish the appeal of real estate investment trusts, leaving the sector’s valuation below where it was in 2009. Land Securities Group (LSE:LAND) today rallied by 16.5p to 549p and British Land Co (LSE:BLND) by 8.2p to 351p.
Bank of America has Buy recommendations on both stocks, with price targets of 700p and 450p respectively.
It added today: “The sector offers 33% potential return, of which 6% is dividends, and has not been this cheap for 20 years. But the rates’ turmoil means things could go either way - it's make or break time for REITs.
“We see signs of earnings recovery fuelled by super-tight credit conditions, rental growth normalisation above inflation and bottoming asset prices.”
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