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CONTRIBUTORS

Chris Galipeau

Senior Market Strategist
Franklin Templeton Institute

Lukasz Kalwak, CFA

Market Strategist
Franklin Templeton Institute

With the start of interest-rate cuts by the Bank of England (BoE), history indicates mid- and small-cap stocks may outperform.

Key takeaways:

  • Historically, when the BoE has cut interest rates, mid- and small-cap stocks have tended to outperform large caps in the following year.
  • Rate cuts during an economic expansion have historically led to bullish investor sentiment with minimal drawdown risk.
  • Even for rate cuts during recessionary conditions, history shows small-cap stocks generated a positive return on average.

In August, the BoE implemented its first interest-rate cut in over four years, reducing the key rate to 5%. Financial markets are now pricing in a high probability of another rate cut by the end of the year.

With the FTSE 100 Index, FTSE 250 Index and FTSE Small Cap Index hovering just below record levels, market participants are debating which equity styles might perform best during the early phase of a rate-cutting cycle.

Will investors become even more bullish, viewing the cut as a measure to help prolong the economic expansion? Or will they become bearish and interpret the cut as a sign that the economy is slowing?

In this paper, we answer these questions and turn to history as a guide.

WHAT ARE THE RISKS

All investments involve risks, including possible loss of principal.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.

Equity securities are subject to price fluctuation and possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Large-capitalization companies may fall out of favor with investors based on market and economic conditions.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

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