Today's Bank of England interest rate cut to 4.25% should benefit infrastructure, renewable energy and property investment trusts, analysts said, as all three are sensitive to interest rate changes.
Some sectors, previously hit hard by the spike in rates in 2021, may now see improved prospects, analysts said.
Colette Ord, investment company analyst at Deutsche Numis, pointed out that infrastructure investment companies are well-positioned.
“We believe that infrastructure investment companies are likely to be a key beneficiary of lower interest rates,” Ord said.
"In periods of lower bond yields, the inflation-linked, contracted cashflows generated by this sector are generally valued more highly by equity markets."
She said she believes the market "often overlooks the ability for infrastructure investment trusts to grow earnings through active management".
Her stock selections included International Public Partnerships Ltd (LSE:INPP), which displays a number of her preferred risk adjusted return characteristics, along with exposure to some key infrastructure growth trends such as the energy transition.
“We do not think that the current 22% discount reflects the portfolio return potential, which is underpinned by a high degree of revenue visibility," Ord said, adding that the current dividend yield of 7.7% is fully covered by earnings and even if no further investments are made, the company could pay a growing dividend for at least a further 20 years.
Peel Hunt analyst Markuz Jaffe also likes INPP, noting that the portfolio is around 73% weighted to the UK and has some investments benefiting from government-backed cash flows.
In addition, Ord suggests "jam tomorrow" stocks, such as early-stage tech, which were hard hit as interest rates rose, should therefore be beneficiaries as rates come back down.
An example she gave as Seraphim Space Investment Trust PLC (LSE:SSIT), which has a portfolio of space tech companies.
"Perhaps more significant than the change in interest rates is a focus on defence spending," she said, with a number of portfolio companies focused on satellite imagery.
Ashley Thomas, an analyst at Winterflood Securities, said the pace of interest rate declines remains uncertain given the volatile geopolitical backdrop, but any further declines in UK rates would help the three sectors, particularly if also accompanied by lower 10-year gilt yields.
Within the infrastructure sector, Thomas said falling gilt yields should result in lower discount rates, "which, put simply, would likely lead to higher valuations today".
The discount rate is likely to be "more meaningful" for longer-life, lower-risk economic infrastructure assets such as the water, energy, transport and accommodation investments.
This is the core focused on one of Thomas's picks, HICL Infrastructure Company Limited (LSE:HICL), where nearly 90% of portfolio revenues are contracted or regulated, with an average asset life of more than 29 years and 65% of the portfolio based in the UK.
"We calculate that a 1% reduction in HICL’s 8.1% discount rate would increase its net asset value (NAV) by around 11%, which should add around 5% to the share price given the trust’s 24% discount to NAV," Thomas said.
The recent cash offer from British Columbia Investment Management for similarly focused BBGI Global Infrastructure SA (LSE:BBGI), which has 33% exposure to the UK, was made at a small premium to its December NAV and has highlighted the attraction of the sector, Thomas said.
"Remember, availability-based revenues are paid whether the assets are used or not, usually through government contracts, and so are particularly valuable in the context of an increasingly uncertain macroeconomic outlook."
As for renewable energy generators, Thomas says lower long-term gilt yields would benefit their discount rates too.
Bluefield Solar Income Fund (LSE:BSIF) was highlighted a a 100% UK-based and currently with an 8.0% discount rate.
"A reduction of 1% in the discount rate would increase NAV by around 12%, which should add around 18% to the share price given the 21% discount at which the shares trade,” said the Winterflood analyst.
Shore Capital analyst Rachel May highlighted that the pure-play solar funds are currently trading on the widest discounts on record despite a growing number of disposals at values consistent with the fund’s balance sheets.
This demonstrates the ongoing disparity between public and private valuations, she said.
May likes Foresight Solar Fund Ltd (LSE:FSFL), trading on a 30% discount with a 10% yield, with its portfolio including solar assets located across the UK, Spain and Australia, with a development pipeline of Spanish battery energy storage system (BESS) and more solar projects.
"The trust benefits from a high proportion of long-dated inflation-linked revenues, providing good visibility over future cash flows and dividend cover: 88% of revenues are contracted for the current year, and the dividend is expected to be more than fully covered."
A cut in the BoE's Bank Rate should correspond with a reduction in the sterling overnight index average rate, aka SONIA, reducing debt costs for funds with unhedged floating rate debt using SONIA as a reference rate.
Emma Bird, head of investment trusts research at Winterflood, points to Custodian Property Income REIT PLC (LSE:CREI) as a potential beneficiary, as it has 18% of its borrowings subject to a variable rate linked to SONIA.
It should therefore see reduced debt costs and subsequently higher earnings as SONIA falls, she says.
Peel Hunt's Jaffe also likes Greencoat UK Wind PLC (LSE:UKW), a pure play on the UK wind sector and has "a strong track record of cash generation, delivering dividends that remain explicitly linked to UK inflation (RPI) as part of an attractive total return profile".
"As a result of its geographic focus, UKW is clearly exposed to sterling base rates through the combination of changing gilt yields driving underlying asset valuations, investors’ dividend yield expectations influencing the share price, and any potential reductions in financing costs," he says, noting that the discount to NAV was 22% and the yield 8.8%.