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Questor: Investors still undervalue the potential in these British stocks

Questor: Investors haven't yet realised the potential in these British stocks
Questor: Investors haven't yet realised the potential in these British stocks

The first interest rate cut is now imminent.

Whether it takes place next week, when the Bank of England’s Monetary Policy Committee is scheduled to meet, or over the coming months, UK-listed stocks are set to experience a tailwind from a loosening of monetary policy.

Of course, inflation remains above the central bank’s 2pc target.

Furthermore, the economy expanded by a relatively fast-paced 0.6pc in the first quarter of the year.

But with inflation likely to continue its decline as the full impact of previous interest rate rises are felt, and any future changes to monetary policy set to take many months to have their desired impact on economic growth, policymakers are highly unlikely to maintain Bank Rate at its current level.

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Although investors are widely anticipating interest rate cuts to be implemented over the medium term, in Questor’s view they have not yet adequately priced a looser monetary policy into stock market valuations.

Mid and small-cap shares, in particular, currently trade on exceptionally low valuations in some cases.

While, in certain instances, this is justified due to disappointing financial performance among some UK-focused companies, investors do not appear to have factored in the prospect of improved operating conditions that boost profitability.

They also do not seem to have yet anticipated a flow of capital from perceived safer investments, such as cash, to riskier investments, including shares, as interest rates fall and the economy’s performance gathers momentum.

Therefore, Questor remains upbeat about the long-term prospects for small and medium-sized UK companies.

Update: Premier Miton

Fund management firm Premier Miton’s recently released half-year results were somewhat mixed.

While assets under management rose by over 9pc during the six-month period, this was due to the impact of acquisitions and investment performance.

The firm continued to experience net outflows, with them rising to £486m (excluding the impact of acquisitions and disposals) versus £32m in the same period of the prior year, as investor interest in risky assets remained tepid amid a restrictive monetary policy.

This contributed to a 28pc year-on-year decline in pre-tax profits.

Elsewhere, the company reported that around two-thirds of its funds have delivered an investment performance which is above their sector median since launch or tenure.

With interest rate cuts likely to have a positive impact on fund flows over the medium term, the outlook for the firm could improve.

Premier Miton’s shares currently trade on a price-to-earnings (P/E) ratio of 8.2.

Since being added to our AIM portfolio in January last year, they have generated a 38pc capital loss.

This compares with a 10pc decline for the FTSE AIM All-Share index over the same period.

Clearly, this is a hugely disappointing relative and absolute performance.

However, with the company having experienced a tough operating environment that is likely to improve, and trading on an undemanding valuation, it deserves more time to produce a share price recovery.

Questor says: hold

Ticker: PMI

Share price at close: 72p

Update: Impax Asset Management

Another of our AIM portfolio holdings, Impax Asset Management, also recently released half-year results.

The company’s assets under management rose by 5.9pc to £39.6bn during the six-month period, although this was due to investment performance that added £4.9bn to the total.

Net outflows amounted to £2.7bn during the period, with higher interest rates prompting a shift towards less risky assets among the firm’s clients.

Revenue in the first half of the year declined by 2pc versus the same period of the prior year, while operating profits moved 6pc lower.

The company increased its exposure to fixed income assets via the acquisition of Absalon Corporate Credit, while interim dividends per share were unchanged at 4.7p.

Since being added to our AIM portfolio in July 2022, shares in Impax have fallen by 29pc.

This compares with a decline in the FTSE AIM All-Share index of 11pc over the same period.

The stock’s disappointing performance means it now trades on a price-to-earnings ratio of 11.1. Clearly, though, this figure could rise if profits continue to fall in the second half of the year.

Although share price volatility may remain elevated in the short run, the company’s operating environment is likely to improve as interest rates are cut.

Therefore, it will remain a holding in the portfolio.

Questor says: hold

Ticker: IPX

Share price at close: 390p


Read the latest Questor column on telegraph.co.uk every Sunday, Monday, Tuesday, Wednesday and Thursday  from 8pm.

Read Questor’s rules of investment before you follow our tips.