Here is a collection of FTSE stocks that could deliver huge returns in 2025

Value funds look FTSE as they hunt for undervalued or cheap stocks to add to their portfolios. The valuation is very attractive, but some analysts have highlighted that buying FTSE shares may make sense due to historical trends and economic theory.

Good forecast

The UK is currently in the middle of an interest rate cut cycle, and historical data shows that the FTSE indices have generally performed well during interest rate cut cycles. Also, there is a tendency for mid-caps to outperform large-caps. During the 1992-1994 rate cut, the FTSE All Share rose 49%, while FTSE 250 (excluding investment trusts) had a total return of 87%.

In fact, in the last five rate cut cycles, UK stocks have tended to rise in the year following the initial rate cut. Performance was particularly strong when recessions were avoided, such as in the 1996-1997 and 1998-1999 cycles, when returns averaged 31.5%.

However, it is important to note that performance can vary depending on the broader economic conditions. For example, UK stocks performed very poorly during the dot-com boom (2000-2003) despite interest rates being lowered.

Some win more than others

One main reason for these periods of underperformance in FTSE stocks is that savings accounts and bonds offer lower returns when rates fall. This means that there is more incentive for individuals to invest in stocks.

However, some sectors are more likely to succeed than others. Retail is often highlighted as a sector benefiting from the cutbacks. The consumer staples sector and homebuilders tend to see big gains as disposable income increases. On the grocery front, shoppers can trade in the likes of Tesco again Marks & Spencer. Other beneficiaries may include The Currys again Swiss watchesboth sellers of non-essential goods.

Real estate stocks, especially those with long leases and secure income streams, also tend to stabilize as prices fall. Additionally, companies that offer interest-free loans, such as DFS Furniture. They can benefit from lower rates, as every 1% change in the Bank of England rate affects their cost of providing interest-free credit by £6m.

Don’t forget about banks

Banks are the same Lloyds (LSE:LLOY) typically outperform in the first year after a rate cut begins, disproving the belief that rate cuts hurt profits. While low rates may depress net interest rates, banks benefit from increased lending activity as borrowing costs decrease, which encourages economic growth. Additionally, asset prices are rising, especially in real estate, which supports their loan portfolio.

In addition, improved economic conditions lead to lower default rates and reduced loan loss provisions. In addition, banks such as Lloyds use hedging strategies to reduce the impact of falling prices. Examples of these include forward swaps and rate locks, which protect favorable terms over time. This can be one of the most overlooked parts of an investment thesis.

A 14% rise in Lloyds shares in 2024 shows how financial institutions can thrive in a falling rate environment. However, the UK’s biggest mortgage lender has been caught up in an investigation into mis-selling funds. The fine could reach £3.9bn according to analysts.