Stock Take
European equity markets finished January at record highs last week. However, US President, Donald Trump, announced tariffs on goods from Canada, Mexico, and China over the weekend, suggesting that February might prove more challenging.
A 2% rise in the FTSE 100 meant the UK index finished the month up over 7%.
The upbeat nature of UK markets was at odds with the wider economic performance of the country. The UK has been experiencing a prolonged period of weak economic growth and above target inflation. On top of this, business confidence has been subdued, and the Government has found itself with limited financial options to generate growth.
However, many of FTSE 100 companies earn the majority of their income overseas. As the pound is currently weak against the US dollar (and other currencies), earnings brought back to the UK are worth more when translated back into sterling.
January was similarly positive for European markets. Like the FTSE 100, the MSCI Europe ex UK hit record levels at the end of January.
Last week the European Central Bank (ECB) cut interest rates. Given the weak economic news from much of the bloc, the ECB is expected to continue cutting rates at the year progresses.
Turning to the US, the week started on a negative note for the tech sector. The Chinese DeepSeek AI model casting serious doubt that America’s lead in the field was untouchable. It also raised questions over the market value assigned to several AI-related companies.
Nvidia, which has experienced extraordinary growth over recent years, suffered the largest single daily drop in stock market history. Last Monday, close to $600 billion was wiped from its value. Although it recovered over the second half of the week, the share price finished down approximately 15%.
Martin Hennecke, Head of Asia & Middle East Investment Advisory at St. James’s Place, said: “Just when it seemed that the US tech/AI rally and dominance would last forever, the news on DeepSeek as a potential industry disruptor hit home hard. There is uncertainty about specific market impacts as yet, and it may still turn out to be less of a bombshell than initially thought. However, it does serve as a timely reminder of the importance of maintaining prudent risk management and diversification at all times.”
Tariffs
Over the weekend, US President Donald Trump confirmed 25% tariffs for Canadian and Mexican goods (bar energy imports from Canada, which will face a 10% tariff). China will face 10% tariffs.
Soon after, Canadian Prime Minister, Justin Trudeau announced 25% tariffs on a wide spectrum of US goods, while both China and Mexico promised responses of their own.
For his part, Trump has also put the EU in his crosshairs for tariffs in the future, telling the BBC: “It will definitely happen with the European Union.”
On the UK, Trump’s language has so far been less explicit. This could result in Prime Minister Starmer needing to find a balancing act between his aim of ‘resetting’ the relationship with the EU, while avoiding Trump’s ire.
Although it will take time to fully unpack all the implications of a potential trade war between the US and the EU, Canada, Mexico and China, markets have so far delivered a fairly standard response. The FTSE 100 opened this week down 1.3%, while markets in France, Germany and Japan were down more than 2%.
The falls caused by the tariffs were fairly broad based, but car manufacturers were amongst the worst hit. Several European car manufacturers shares fell over 4% on Monday morning.
Commenting on the tariffs, Hetal Mehta, Head of Economic Research at St. James’s Place, said: “The news of tariffs levied by the US against Canada, Mexico and China will inevitably raise questions on how central banks – especially the ECB but also the Bank of England (BoE) – should respond should they also be subject to such protectionist measures. It is too late for the BoE to adjust its forecasts and assumptions for global growth, but any further weakness in the euro area economy will likely spillover to the UK. For some MPC members, the case for a pre-emptive cut may be enhanced.”
She adds: “Ultimately, the US consumer has been the powerhouse for the economy, and one way or another is now on the hook for paying for these tariffs (higher inflation, higher interest rates, or perhaps further down the line, higher taxes).”
Wealth Check
Max out your ISAs. It’s a familiar tax year-end mantra – and topping up before April 5th should be an annual to-do at this time of year for most savers and investors. But while it’s key to put as much into your ISAs as you feel able to, it’s also important to know that what you hold is still giving you real value for money.
As your own life goals shift, you may want to rebalance your mix of ISAs and their rate of return. ISAs have to ‘earn their keep,’ especially if interest rates continue to slowly come down.
Sometimes the question is asked: Cash or Stocks and Shares ISAs? It’s not an either/or decision. Both have pros and cons, which means you can play them to your advantage in longer term financial planning. Since they’re conveniently easy to access, Cash ISAs can be a useful ‘rainy day’ fund for unexpected expenses. But their rate of return is fixed by interest rates.
If you’ve had any of your Cash ISAs for more than five years, then what is a good ready source of cash for emergencies may be becoming part of your long term savings plan.
Over the longer term, you’re less likely to get the same growth from a Cash ISA that a Stocks and Shares ISA could bring. In this case, maybe you don’t need to hold as much in a Cash ISA?
If you’re saving for longer-term goals, such as retirement, or to send your children to University, Stocks and Shares ISAs have a greater potential to grow than Cash ISAs. If you’re holding a lot of money in Cash ISAs or savings accounts, you may miss out when the markets are doing well. Interest rates are less ‘reactive’ to periods of prosperity or stability, so Cash ISAs take longer to ‘catch up’ in terms of returns.
But it’s always important to understand that, since markets fall as well as rise, you are accepting a higher ‘risk’ if you choose to invest solely in Stocks and Shares ISAs.
Most people find that a combination of Stocks and Shares and Cash ISAs give the best of both worlds: financial resilience in both the short- to medium-term, coupled with potential to create wealth in the longer term.
The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
Please note that Cash ISAs are not available through St. James’s Place.
In The Picture
Happy 40th birthday, Nasdaq-100!
For four decades, the Nasdaq-100 index has been tracking some of the world’s most innovative companies, from tech giants like Apple, Microsoft and Nvidia to major players in consumer and healthcare.
Launched in 1985, the index is weighted by market capitalisation, meaning the biggest companies have the biggest influence.
This chart shows the Nasdaq-100’s performance from its inception to today.
Past performance is not indicative of future performance.
Please note it is not possible to invest directly into the Nasdaq-100 and the figures shown do not take into account any charges applicable to the appropriate investment wrapper or any relevant tax charges.
The Last Word
“I wouldn’t say there’s a timeline, but it’s going to be pretty soon.”
US President Donald Trump on when potential EU tariffs might come about.
SJP Approved 03/02/2025