By Darius McDermott, managing director of FundCalibre
As had been widely expected, the Bank of England cut rates by 0.25% bringing the base rate to 4%, its lowest level since early 2023. The decision was close, and traders have been busily revising their view of how many more cuts the central bank might deliver for the remainder of 2025. Nevertheless, there may be some parts of the market that are allowing themselves a small celebration.
Smaller companies managers, for example, will be hoping that the rate cut helps build on the momentum seen in the sector over the past couple of months. Abby Glennie, deputy head of smaller companies at Aberdeen, says: “While it is not universally true, smaller companies tend to be seen as more vulnerable to high interest rates. Lower rates create a more favourable environment for smaller businesses to flourish.
“Equally, rate cuts tend to oil the wheels of economic growth. They encourage businesses to expand, and they give consumers more money in their pockets. This is important for small companies that are often more dependent on the domestic UK economy.”
In reality, there are idiosyncratic factors that are likely to be more important for individual smaller companies – and many quality-focused fund managers, such as those at Aberdeen and Marlborough, do not invest in companies with higher debt. However, investment markets are sentiment-driven. The sentiment towards smaller companies has long been wildly out of step with the operational performance of many smaller companies and a rate cut may serve to bring the two closer in line.
Paul Marriage, manager of the Premier Miton Tellworth UK Smaller Companies fund, says: “Following a period of elevated uncertainty, corporate earnings are not without risk but a resilient consumer, manageable inflation and falling interest rates provides a backdrop that could see positive momentum continue.”
Infrastructure and property funds are also natural beneficiaries of falling interest rates. The IA Infrastructure sector has been a strong performer for the year to date, with the average fund up 9.6%*. The sector has grown in popularity as a bulwark against inflationary pressures and a safe haven in an increasingly volatile world. Infrastructure companies should also benefit from a renewed drive to improve infrastructure in Europe and the US.
Alec Cutler, manager on the Orbis Global Balanced fund believes this will continue. He cites Maslow’s hierarchy of needs – the idea that humans are motivated by five categories of needs. He says: “Many developed nations—who have for some time been luxuriating in higher-order needs—have increasingly done so at the expense of the foundational ones, to the point where the base can no longer support the top of the pyramid. Governments are now being forced to reallocate resources from the top back to the bottom.” Infrastructure, along with areas such as defence and energy security, are part of this reallocation.
For infrastructure, as for smaller companies, the interest rate cut probably isn’t the factor that will make the most difference. However, it removes a perceived barrier to stronger performance from the asset class.
Property should also have been a beneficiary from recent interest rate cuts, and its lacklustre performance remains surprising. There are structural shifts in certain parts of the market – such as offices and retail – but these are well understood and reflected in valuations. Areas such as logistics have done very well since the start of the year, but the average UK commercial property investment trust is up just 7.2%, which puts it well behind infrastructure investment trusts (12.3%)*.
Marcus Phayre Mudge, manager of the TR Property investment trust, says: “We’ve had a good start to the new financial year…The interest rate cutting cycle in the UK and Europe is well underway. We’ll see that continue to progress. The market is expecting more cuts in the UK and Europe. The cost of borrowing is not only a function of the shape of the yield curve, but the margin that banks and lenders require. That margin is getting smaller as more lenders enter the market and we get a more competitive market. That’s a healthy sign.”
He says the underlying fundamentals for commercial property are positive, particularly for the higher quality end of the market. This might be West End prime offices, retail warehousing or self-storage: “The very best are doing well because there is a shortage…We’ve had little net construction, and that’s been driving up rents.”
The other area that should do well from lower rates are long duration assets. That means long-dated government bonds and growth funds – exactly the type of investment that did well in the post-GFC low interest rate environment. However, we’d sound a note of caution here: many growth funds have been heavily skewed to the US technology sector. While we see no problems with this – the latest earnings season has shown the strength and resilience of many of these companies – these companies still look expensive, rates are not yet coming down in the US and there is still considerable uncertainty on tariffs.
A rate cut should be good for some parts of the bond market, but it was largely factored into market pricing. If anything, the relative hawkishness of the Bank of England has been a cause for minor alarm, sending the UK 10 year gilt yield marginally higher since the announcement.
Overall, a solitary 25bps rate cut is little to get excited about. However, it should support some areas that have been weaker since the abrupt rise in rates in 2023 and have yet to recover in full.
*Source: FE fundinfo, at 8 August 2025
This article first appeared in our sister publication, Portfolio Adviser.
