A belated start to 2025

A belated happy new year to all our readers, and an apology for the several-days-late arrival of your first commentary of 2025. I’ll also freely comment on the first week of February as recompense. You’re welcome.

Market reactions to Trump Mk II

The story thus far is of market reaction to Trump Mk II. His statesmanlike proclamations include a pitch to buy Greenland, a plan to turn the Gaza Strip into a Levantine Las Vegas, a ban on diversity programmes and the abolition of the one cent coin. Threats to impose tariffs on sundry nations’ exports into the US included small parcels posted from China and anything emanating from Canada or Mexico as punishment for ‘allowing’ illegal fentanyl trafficking. The latter threats were withdrawn after both countries promised to do things they were planning to do anyway. As I write this, news is filtering that Mr Trump intends to apply a 25% tariff on steel imports. It is unclear whether these are on top of the ones he already applied during his last tenure as leader of the free world.

The impact of tariffs on the economy

Investors that prosper in a free-market economy should not like tariffs by definition. Simply put, they are taxes on imports. Rather than making US goods more competitive in their domestic market, they increase consumer prices, and businesses that depend on imported components to manufacture those goods have to pay more for them. Consequently, the prices of competing US-produced goods will also rise. Rising prices equate to rising inflation and higher interest rates. Furthermore, tariffs hinder exports, as resources must be shifted from export industries to produce formerly imported goods. Deporting unauthorised immigrants further diminishes that workforce.

Markets shrug off tariff concerns

Gradually through the month, markets came to regard ‘tariff talk’ as a negotiating tactic rather than a serious attempt to apply these surcharges, at least for now. Shrugging off inflation fears and a higher-for-longer interest rate policy, bond yields have been falling (and hence prices rising) in the US and the UK. Consequently, risk assets worldwide have come to ignore the tariff tantrums and exhibited a strong start. Portfolios at all risk levels will have seen above-average, positive performance driven by (amongst others) European shares, which have risen over 8% in sterling terms. While last year told a tale of US exceptionalism, the commencement of 2025 reminds us there is more to investment than merely picking seven US technology companies. The US market is up over 3%, but this is not due to technology stocks, which faced a setback following the appearance of DeepSeek, a free, open-source AI equivalent to ChatGPT that challenges the revenue model of US tech companies’ AI projects. Nvidia’s share price fell by 10% over the month and, at one point, by 20%, translating to a remarkable loss in value of nearly $600bn, surpassing the combined market capitalisation of Astra Zeneca, Shell, and HSBC.

The Bank of England and UK market trends

The Bank of England reduced the base interest rate to 4.5%, as our team (and everyone else) boldly predicted, despite (or indeed because of) the anticipated slower economic growth and a likely increase in the core inflation rate. All nine committee members voted in favour of a cut; notably, two members sought a 50-basis point reduction, one of whom has previously been a consistent opponent of rate cuts. A frankly more pessimistic outlook for the economy now implies more rate cuts than would otherwise have been the case. Thus, the Pound weakened; a weak pound and a concurrently strong dollar mean that our largest exporting companies’ dollar earnings will convert into more pounds (and consequently, higher profits and dividends). This series of events propelled the FTSE 100 to a new all-time high after rising 7.5% in the first six weeks of 2025. Rachel Reeves’s growth focus message may be getting through to overseas investors. As I write however, less of the euphoria seems to have spread to small (0%) and mid-cap (2%), but the UK remains very cheap, and there’s a long way to go this year.

A brewing concern

Finally, Coffee. Recently, the price of Arabica beans (which make the ‘best’ coffee) hit a 53-year high, having doubled in a year. This is primarily because of bad weather in Brazil, where most beans are farmed. Watch for price rises in your morning cuppa, and see you next month.

Graham Bentley

Chief Investment Officer

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