It was no coincidence that Marks & Spencer secured the best gain in the FTSE 100 on the day that the Bank of England cut base rates to their lowest level since 1954.

Already buoyed by relief that Tuesday’s first-half figures contained no new profit warning, the retailer was swiftly identified by the stock market as a two-time winner from cheaper money. First, like all store owners, it should benefit from the increase in its customers’ disposable income from reduced mortgage payments. Secondly, and perhaps more persuasively, M&S has net debt of £3.1 billion, which means that an interest rate cut of 1.5 percentage points translates into a £50 million drop in its annual interest bill. That is significant for a company expected to produce £500 million of pretax profits in its next financial year.

However, identifying beneficiaries of the Bank’s bold action is fraught with difficulty. Conventional wisdom suggests that falling interest rates are good for retailers, housebuilders and banks. Even at today’s depressed valuations, there are powerful reasons for keeping those sectors at bay.

Even setting aside the fact that disposable income is not the only determinant of consumer demand, retailers face severe pressure on profitability next year as the hit from a stronger US dollar, the currency in which most goods are sourced, feeds through their supply chain.

For housebuilders, monetary easing helps existing homeowners but does nothing to assist first-time buyers, for whom banks’ loan-to-value ratios and credit scoring criteria remain greater obstacles. Nor will cheaper money stave off the wave of recapitalisations that surely must await the sector over the next few months.

And banks? The dilutive effects of large share issues and constraints on dividend payments - historically one of the sector’s biggest attractions - remain the immediate concern. Farther out, it is an expected surge in bad debts that counsels caution. The grim corporate insolvency data published yesterday is only one harbinger of an expected surge in nonperforming loans; worsening figures for mortgage arrears and credit card delinquencies are others.

Historical precedents are of limited use. Citigroup points out that, in the aftermath of the previous sharp fall in UK rates - on Britain’s exit from the exchange-rate mechanism in September 1992 - the stock market rallied by nearly a quarter in the following three months. Indeed, after 12 months, it was the interest-rate-sensitive sectors - banks, construction and property - that had duly outperformed (see chart below). However, Citigroup also notes that in 1992 the economy had already been in recession, or near-recession conditions, for a couple of years. Today, the recession has only just started and is expected to be deep and prolonged.

So where to turn? Perhaps the most painless way for investors to play falling rates is at one remove, through the continuing depreciation of sterling. Credit Suisse, for example, expects the pound to touch $1.30 by 2010. That should favour stocks with a large slug of overseas sales, whether defensive, such as AstraZeneca, where every 10 per cent appreciation of the dollar against sterling boosts earnings by 5 per cent, or cyclical, such as Rolls-Royce, which bears costs in sterling but books sales in dollars. Elsewhere among engineering, a sector with a high proportion of big dollar and euro earners, Bodycote, the heat-treatment specialist, stands out, not least because, after the £417 million sale of its testing division, it is set to declare a cash return of up to 81p a share (the present share price is 134p) within weeks. The other key consequence of lower interest rates is to make equities more attractive relative to cash. In short, the returns available from risk-free assets have suddenly diminished, such that shares don’t have to work as hard to match their allure. As the chart shows, the relative returns from dividends against cash are at their highest for more than 40 years.

Of course, falling company profits are putting dividends under severe strain. With stock markets pricing in a 40 per cent decline in corporate earnings, dividend payments might be expected to follow suit, which, as Morgan Stanley points out, would mark the biggest drop in payouts since the early 1960s.

Sifting through lowly geared large-cap stocks with high yields whose dividends are at least covered twice by earnings, the US broker picks out Anglo American, AstraZeneca, BP, Royal Dutch Shell and RSA, among others. The alternative tactic – of pursuing stocks, such as M&S, where the impact of falling profits should be mitigated by falling interest payments – still appears the less appealing.

All the same, companies with a high proportion of short-term debt, such as Inchcape, Logica and Vedanta Resources, which until recently were penalised for their perceived refinancing risk, have become more attractive because of their ability to lock in lower interest costs.

Borrowers might breathe a little easier after the events of this week; investors, unfortunately, cannot.

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