Market Update – February 2025
February continues a recent trend of market uncertainty. Investors are navigating a world of geopolitical shifts, particularly due to President Trump’s stream of executive orders and foreign policy announcements from the US. In the UK, investors are reflecting on tightening monetary policy and uncertainty about future cuts to the base rate in 2025.
UK policy
The Chancellor, Rachel Reeves, is still wrestling with how to kick-start UK economic growth. In particular, rumours are circulating that the Cash ISA allowance could be cut to £4,000, instead of staying at the full £20,000 ISA allowance.
The move could raise more revenues for the Exchequer, which is facing greater strain as the Prime Minister commits to raising defence spending to 2.5% (partly funded by cuts to overseas aid in the near term).
The Chancellor might also hope that cutting the Cash ISA allowance would encourage more people to invest in UK companies, which are facing declining business confidence in 2025. However, the idea is facing great opposition from the Building Societies Association (BSA), and 73% of
UK adults are opposed to bringing the £3,000 limit back to Cash ISAs.
The UK economy
According to forecasts, UK GDP growth is expected to be 0.4% in Q1 2025. Annual growth predictions range from 1.2% to 1.7%, depending on different analyst estimates.
This is lower than previous forecasts, such as the 2% prediction by the Office for Budget Responsibility (OBR) in November 2024. There are at least three reasons for this.
Firstly, inflation is proving more “sticky” than many thought, with the CPI measure rising to 3% in January. This could reduce the likelihood of cuts to the base rate later in the year, which would normally stimulate growth (e.g. due to lower borrowing costs for businesses).
Secondly, the world faces more trade uncertainty as President Trump threatens tariffs on other countries. Although Trump has hinted the UK could be spared from US tariffs, the knock-on effects from other countries could add to inflationary pressures at home.
Thirdly, UK businesses are still reacting to the Chancellor’s Autumn Budget in November 2024. Employers will face rising National Insurance rates in April, going up from 13.8% to 15%. Many firms have indicated that these costs will be passed down to consumers as higher prices at the checkout, or to staff (i.e. halting/scaling back plans for hiring and pay rises).
The UK market
More positively, the FTSE 100 has experienced an upswing since early 2025. On 2 January, the index stood at 8,260, and by the end of February, it had reached 8,809.
Despite concerns about the wider UK economy, investor optimism appears partly fuelled by the hope of a new UK-US trade deal – particularly after Keir Starmer’s recent “successful” visit to the White House, where President Trump held out the possibility for a “Real trade deal”.
Lower interest rates, recently cut in February, also seem to be feeding into lower lending rates. The British pound (GBP) has strengthened in February, but Bank of England Governor Andrew Bailey cautions that it may not hold above $1.26, expecting it to settle closer to this level by the end of March.”
Various sectors are showing some encouraging signs. The Greater London Authority reports that tourism to the capital is now back to pre-pandemic levels in 2019. Retail footfall and debit card spending were also on the rise in January, suggesting consumer confidence may be starting to gradually pick up.
The Global Outlook
In the US, the Chair of the Federal Reserve (the Fed), Jerome Powell, has indicated that further interest rate cuts are unlikely to arrive any time soon. Inflation remains elevated, and the jobs market is still resilient.
The Fed will likely face a challenging 2025 as President Trump influences monetary policy with his fluid tariff-led economic policies. The latter will have a big impact on inflation – i.e. increasing purchase prices for imported goods, such as steel and aluminium.
The recent US growth outlook for 2025 is now 2% to 2.7%, more impressive than the UK’s 1.7% (optimistic) forecast. However, US markets are going through a period of volatility as investors seek to navigate uncertainty about tariff plans and rising geopolitical risks.
Investors should note that February, historically, is usually a month marked by sell-offs and underperformance – particularly in a post-election year. However, the market’s post-election bump certainly seems over, with Musk’s Tesla stock leading the pullback.
21 February was also significant as weaker service sector and consumer survey data was published, contributing to a 600-point fall in the Dow Jones Industrial Average (DJIA).
In the eurozone, recent inflation figures came in higher than expected at 2.50%. This follows a cut in the base rate by the European Central Bank (ECB) in January, now standing at 2.75%.
Indeed, the STOXX Europe 600 has seen a positive start to the year, rising from 508 in early January to 557 in late February. Investor sentiment seems to be boosted by economic recovery, strong corporate earnings, and optimism about a possible end to the war in Ukraine.
Further afield, emerging markets generally had a positive month in February. However, a notable divergence was seen between equities in China and those in India.
The former has seen a boost from DeepSeek’s arrival (a possible cheaper option from US-tech AI), and expectations of a further economic stimulus. By contrast, India has faced a depreciating currency and weakening investor interest as monetary policy tightens and the economy faces uncertainty.
