Falling inflation and interest rate cuts should get shares in these two stocks moving

fever tree
fever tree

Impending interest rate cuts are poised to revitalise the performance of consumer-focused companies. It’s true that the process of monetary policy easing could prove to be somewhat protracted; inflation, after all, still stands at twice the Bank of England’s 2pc target. But it is widely expected to fall over the coming months, and the economy is now officially in recession, so the Bank Rate is almost certain to start its much-anticipated decline soon.

A combination of lower inflation and falling interest rates will lead to greater spending power for consumers.

Even though their pay is currently rising in real terms, and has been since April last year, the return of cheaper borrowing and a more “normal” pace of price increases, as well as stronger economic growth, may be the key to unlocking a much-needed “feelgood factor” that encourages consumers to spend more.

Therefore, in Questor’s view, now is an opportune time to invest in consume

r stocks such as the beverages company Fever-Tree. Its shares have risen by 20pc since we added them to our Inheritance Tax Portfolio in October last year, although the company’s recently released annual trading update highlighting a somewhat mixed performance.

While sales in Britain declined by 1pc amid a tough consumer environment, the company recorded revenue growth of 24pc in America. It is now Fever-Tree’s largest region by sales as a buoyant economy acts as a positive catalyst on performance. Revenues in Europe, meanwhile, grew by just 2pc amid widespread economic weakness.

Encouragingly, the company was able to increase its market share across all key segments. This makes it well placed to capitalise on an improving consumer outlook. And now that the central banks in Europe and America are, like the Bank of England, poised to cut interest rates as inflation falls, the prospects for Fever-Tree’s financial outlook are highly upbeat.

It is also implementing operational efficiencies to reduce costs, which led to an improvement in profit margins in the second half of the year.

As inflation continues its downward trend, and as the company continues to implement price rises and benefit from lower transport costs, it expects to deliver a doubling of profits on the earnings before interest, tax, depreciation and amortisation (“Ebitda”) measure in the current year.

Clearly, short-term forecasts could prove to be somewhat unreliable given the uncertain near-term economic outlook. But Fever-Tree’s solid financial position, as evidenced by its net cash position of around £60m at the time of its half-year results in June, shows it has the capacity to overcome temporary challenges.

With a strong brand, loyal customers and an improving operating outlook, it remains a worthwhile holding and one that has yet to realise its full potential.

Questor says: hold

Ticker: FEVR

Share price at close: £11.55

Update: Jet2

While shares in Jet2 have doubled since they were added to our IHT portfolio in January 2018, they still have further room to run amid the prospect of an improving consumer outlook.

The travel company’s latest trading update, released last month, showed that it was making encouraging overall progress. A solid performance in winter 2023-24 bookings prompted a slight increase in financial guidance for the current year: the company now expects to generate pre-tax profits of between £510m and £525m, compared with previous guidance of £480m to £520m, as higher-margin package holidays account for a greater proportion of sales than in the previous year.

As for summer 2024 bookings, average load factors are currently 1.5 percentage points higher than at the same time last year. Although the number of package holiday customers is up 17pc year-on-year, they account for a similar proportion of overall bookings vis-a-vis the same point of the previous year.

The company also reported that it had taken delivery of five new aeroplanes, while six further aircraft are due to join its fleet before the end of 2025. They have the potential to reduce costs because they are more fuel-efficient than the aircraft they are replacing.

While annual or twice-yearly holidays are arguably a staple rather than discretionary item, Jet2 is still likely to benefit from an improving consumer outlook. Consumers may, for example, holiday more frequently or spend more on each holiday than in recent years.

Jet2’s shares trade at just eight times forecast earnings, so they continue to offer enormous capital growth potential and remain a core holding in our IHT portfolio.

Questor says: hold

Ticker: JET2

Share price at close: £13.95


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