History shows that this is how the FTSE 100 can react to the development of interest rate cuts

In September, the Bank of England committee decided to cut interest rates by 0.25%. This is the start of what many believe is a cutting cycle that could last several years. Such a cycle is not new. In fact, history shows us that it is related to the broader economy. Here is the way FTSE 100 we responded the last time we had the most price cuts in a long time.

A flash from the past

The last time interest rates fell significantly was in 2008/09. It went from 5% in September 2008 to 0.5% in April 2009. This was due to the global financial crisis and was designed to try to stimulate economic demand.

At the beginning of September, the FTSE 100 index was 5,595 points. A year later, it was 5,120 points. Fast forward another year, in September 2010 the index was at the same level.

From that point of view, the interest rate cut did not cause the stock market to rally in the subsequent period. However, there is an important reason why I see a lot of claims that past performance is not indicative of future returns.

We are not in the same position this time. In 2008/09, the black swan event caused great fear. Currently, we are in a period of steady (if slow) economic growth. The reason for the upcoming rate cut is to keep inflation under control. A central bank reduces a position of strength more than weakness. So, I think the FTSE 100 can rally next year, some sectors have performed very well.

My focus area

Another area that I think would do well is real estate investment trusts (REITs). These are the stocks in which the investment manager has a portfolio of properties. A good example is this British World (LSE: BLND).

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice.

This REIT paid a dividend of 5.27 %. It manages commercial sites including campuses, retail parks and urban centres. The latest annual report revealed that the company has a loan to value ratio of 37.3%. This means that when buying a new property, 37.3% of the price paid comes in the form of a loan from the bank.

As a result, lower interest rates should lower the cost of these loans going forward. In turn, this means lower costs for REITs. If income from rent and leases remains the same, gross profit should increase. Furthermore, if interest rates fall and economic growth increases, demand from employers should also increase.

Another risk is that the stock is starting to look overvalued, with a price-to-earnings ratio of 15.34. This may affect the rate of further gains in the share price. Even with this risk, I have the stock on my watch list.