UK fund managers say we have got a once in a generation opportunity to buy great companies cheaply. This is all very well, but when is the UK stock market going to deliver a decent performance? We need a catalyst to trigger more buyers to bid up the shares.

One such catalyst is the Bank of England providing a clearer message on the direction of interest rates and when they might fall, according to fund manager James Henderson. We are not at that stage yet, but it is something to watch closely.

The Bank of England’s decision to leave interest rates unchanged on 21 September could be the first step in this process. Prior to this event, the Bank had raised interest rates 14 times in a row so it feels as if the mood music is changing.

‘It’s still not clear what speed interest rates will come down,’ admits Henderson. ‘I find people are having trouble reading the Bank of England because the Bank of England is having trouble reading itself.’

The Bank’s monetary policy committee voted 5-4 to keep the base rate unchanged at 5.25%. A day later, new data showed UK economic activity falling at its fastest pace since January 2021. The S&P Global/CIPS purchasing managers’ composite index fell to 46.8 in September, down from 48.6 in August. A figure below 50 represents economic contraction.

Once you add in signs the jobs market is weakening and pockets of inflation are falling, it is hard to imagine the Bank of England will find new reasons to raise interest rates again. August’s rate hike might represent the peak for this tightening cycle so the attention shifts to when rates might come down and therefore when UK stocks become more attractive.

It might seem odd to suggest UK stocks will come into favour as the economy weakens. However, the stock market is forward-looking so investors might look past near-term negatives to focus on what a company could achieve in a lower interest rate environment, particularly those already doing things well.

There are certain companies who are already match-fit and might sail through a recession thanks to adjustments made as a result of inflationary pressures and the cost-of-living crisis.

For example, Dunelm (DNLM) has already sharpened its focus on value items and recently said freight costs are easing, which will help margins. Next (NXT) said it was reaping the benefits of having extra warehouse capacity and having efficiency gains in the business.

‘You learn disciplines in a slowdown, you learn about cost cutting, about tough management decisions,’ says Henderson. ‘As things get better, you’ve got your costs under control, and as you get more sales, you find your operating margin opens up. On the upswing analysts never realise how operationally geared companies can be into a better sales environment.’

The UK stock market has gained a reputation for being full of low-growth, old economy companies. What’s often overlooked is how mixed in with such companies are quality businesses that still have decent growth prospects. These are the shares you should be buying.

History suggests the point at which valuations are low and no-one is interested is the time to buy. If you miss this opportunity and valuations remain depressed, there is a risk that someone comes along and takes over the good companies. That reduces the opportunities for investors which would be a bad outcome for everyone.

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