Market Overview

Dear Investor,

This week, the Bank of England has been in sharp focus, cutting interest rates to 4.5% while slashing its 2025 growth forecast in half. It’s a move designed to provide some relief to the economy, but the underlying message isn’t reassuring. Growth is now expected to come in at just 0.75% this year, down from the previous 1.5% forecast, while inflation is set to rise before it falls back. The central bank is attempting a delicate stagflation-fearing balancing act.

Markets reacted with a familiar mix of currency weakness and stock market gains. The pound dropped over 1% against the dollar before recovering some ground, while the FTSE 100 continued its strong start to the year and surged to record highs. Swap markets are now pricing in at least two more reductions this year, with a 40% chance of a third. But Andrew Bailey was keen to temper expectations, warning investors not to “put too much weight” on the MPC’s vote and stressing that the Bank would proceed with caution.

The inflation outlook adds another layer of complexity. The BoE now expects inflation to climb to 3.7% in the third quarter, primarily due to rising energy costs, before easing to 2.5% in 2026 and reaching the 2% target a year later. In the meantime, businesses and households will have to navigate a period of persistently high prices and sluggish economic momentum – stagflation.

Beyond domestic challenges, global uncertainty remains a key risk. The BoE is closely watching Donald Trump’s proposed tariffs, which could have significant implications for UK trade. While the US president has hinted that the UK may be spared, any shift towards protectionism would add another layer of complexity to the global economic picture. Bailey acknowledged that a more fragmented global economy could weigh on growth, but the inflationary impact is harder to gauge, as much depends on how other countries respond.

The next few months will be crucial in determining whether this is the start of a sustained easing cycle or a cautious adjustment in response to near-term weakness. Either way, we can expect stagflation to be a key theme for investors to be wary of during the first half of the year.

Wishing you a fantastic weekend,

Tom

Market Movers

On the rise: Legal & General (LSE:LGEN) +7.7% on the week

Legal & General’s share price hit a two-year high this morning after announcing the $2.3 billion (£1.8 billion) sale of its US protection business to Meiji Yasuda. The deal includes a strategic partnership, with Meiji Yasuda acquiring a 20% stake in L&G’s US Pension Risk Transfer (PRT) business while L&G retains 80% through reinsurance. Additionally, Meiji Yasuda plans to take a 5% stake in L&G, strengthening their long-standing relationship.

Expected to close by late 2025, pending regulatory approval, the deal will boost L&G’s Solvency II ratio by 22% upon completion. It provides a capital-efficient way to maintain exposure to the US PRT market while freeing up resources for high-growth opportunities.

Investors welcomed the move, driving L&G’s share price to its highest level in two years. With a sharper strategic focus and significant capital returns in the pipeline, L&G positions itself for long-term growth while rewarding shareholders.

REGENCY VIEW:

Legal & General (LGEN) shows a compelling dividend yield of over 9% and an attractive forward P/E ratio of 10.1, positioning it as a strong contender for income-focused investors. Despite recent struggles in profitability and revenue growth, the company’s market position remains solid, and its valuation suggests potential upside, particularly as the market adjusts to its recent strategic moves.

On the slide: Diageo (LSE:DGE) -6.7% on the week

Diageo’s share price has dropped this week following Trump’s tariff wars and an underwhelming trading update, as investors reacted to both external pressures and softer-than-expected financial performance.

The tariff announcement comes at a challenging time, with Diageo already navigating a more cautious consumer environment. While the company highlighted share gains in key markets and strong performances from brands like Don Julio, Crown Royal, and Guinness, overall volume declined, and organic operating profit slipped 1.2%. Additionally, EPS before exceptionals fell nearly 10%, impacted by a weaker contribution from Moët Hennessy and continued foreign exchange headwinds.

Diageo’s leadership has emphasized its confidence in the long-term outlook, citing spirits as an attractive sector with a strong runway for growth. However, the removal of medium-term guidance signals near-term uncertainty, and the latest developments in US trade policy could further weigh on sentiment. The company has outlined plans to mitigate tariff-related disruptions, but with margins already under pressure, investors appear sceptical about the short-term impact on profitability.

REGENCY VIEW:

Diageo’s long-term quality is undeniable, with strong margins and a global portfolio of premium brands, but the stock is struggling under weak momentum and earnings pressure. With the shares down over 30% in a year and trading at 16x forward earnings, investors will need signs of a sustained turnaround before stepping in.

Sector Snapshot

It’s been a strong week for Healthcare with sector heavyweights, GSK and AstratZeneca reporting strong numbers. Materials have been given a boost by some cooling in the Trump tariff ‘trade war’, while Real Estate and Financials have enjoyed the Bank of England’s rate cut.

In terms of weakness, defensive Utilities are bottom of the pack, which is no real surprise with the market breaking out to all-time highs.  

UK Price Action

The FTSE’s strong start to the year has continued with the index hitting new highs. After a trad-war induced wobble on Monday, the FTSE fought back – showing the strength of buying appetite in UK stocks right now.