WeeklyWatch – US red flag prompts Europe defence sector rise

4^th March 2025

Stock Take

Getting defensive on the political stage

European defence company shares surged last week following faltering US–Ukraine talks, prompting Europe to rethink its defence strategy.

When the meeting between Ukrainian President Volodymyr Zelenskyy and US President Donald Trump turned sour, numerous European leaders called for a stronger defence policy – one that can stand more independently of the US. As a result, share prices leapt for European defence companies, with Rheinmetall and BAE Systems soaring over 20% on Friday.

Although talks have begun between European governments, they still face significant pressure before being able to implement these plans. Economic growth across the continent is still low and many nations are facing many fiscal challenges. To effectively increase defence spending, it’s highly probable that cuts will need to be made elsewhere.

UK defence plans

One of the ways in which the UK government is trying to allocate for this is by reducing the foreign aid budget. In addition, Chancellor Rachel Reeves announced plans to change the remit of the National Wealth Fund to free up more money to spend on defence. Further reports have also come to light indicating that money that’s been budgeted for ‘green’ projects will be redirected for defence spending.

In the short term, this is likely to help boost defence stocks, but the same can’t be said for the long term. The Head of Economic Research at St. James’s Place, Hetal Mehta, notes:

“Defence spending is less likely to be economically productive for an economy’s long term output potential. This might be hard to measure in the near term, but if we’re still talking about the productivity puzzle in years to come, this could serve to make the situation worse.”

German election yields good market response

Even before the rises in defence companies, there were some pockets of brightness across the continent. There was positive market reaction to the German election results from the prior weekend and saw Friedrich Merz’s conservative Christian Democratic Union (CDU) party gain the most seats – but not enough to gain a majority. Merz is still in the process of trying to form a coalition government with the centre-left Social Democrat party.

The Fund Manager for European Equities at Schroders, Martin Skanberg, commented on the results, saying:

“There has been consensus building for some time that Germany needs reforms to increase its competitiveness, although the specifics of this will take some time to be negotiated. Merz’s CDU has indicated an intention to drive through reforms and pursue a pro-growth agenda, which should be good for German corporates.

“German equities had been underperforming the rest of Europe in recent years, but that pattern changed in late 2024 and the stronger performance of German equities has continued into 2025. Hopes of reform could lead to an increase in positive sentiment towards German equities, and Europe more broadly.”

US tariffs time

In the UK, it was a positive five days for the FTSE 500 following seemingly productive talks between Prime Minister Keir Starmer and Trump. It seems that the UK may avoid US tariffs, which could stand us in good stead over the next four years.

However, this wasn’t the case for other nations as Trump has continued to outline his plans for Mexico, Canada, China and the EU over the past week. The tariffs for Mexico, Canada and China came into effect today.

US markets struggle

Thursday was a day the tech stocks would rather forget… Nvidia dropped over 6% and there were further small falls across the rest of the Magnificent Seven. Although Nvidia had posted fairly strong results that day, investors still spotted a slip in margins.

Overall, US markets continue to be wary of the talks surrounding tariffs and the weakening economic data. The latter of which included an unexpected drop in consumer spending in January as well as surveys indicating a fall in consumer sentiment.

Wealth Check 

Using pensions and ISAs to reduce your tax bill

Increased tax bills are likely to be the case for many of us this year. With the personal allowance frozen until 2027/28 and the additional rate threshold having dropped to £125,140, more people will find themselves in the higher tax band – particularly if they receive a pay rise or a bonus.

Additionally, the Autumn Budget announced that the £40 billion ‘black hole’ in the nation’s finances will be addressed by increases in Capital Gains Tax, Inheritance Tax and employee National Insurance contributions for businesses.

How you can balance investments with taxes

Due to the changes in taxation, you’re likely to need to invest more money in order to maintain your long-term financial goals. Now’s the time to ensure that your financial plan optimises your pension and ISA allowances so that every penny counts.

Pensions

Of the two options, pensions are the most tax-efficient option for long-term investments. The basic-rate tax relief guarantees a 20% cash boost from the government on the contributions you make (subject to certain limits). A powerful persuader for why a pension should be part of your overall long-term financial planning!

A £60,000 annual allowance for pension contributions is in place and covers any personal and employer contributions. Furthermore, tax relief on personal contributions is limited to the higher 100% of your earnings in the tax year or £3,600 – but it remains a fantastic tax incentive. Personal pensions can be accessed from the age of 55, but bear in mind that this is set to rise to 57 in 2028.

ISAs

These offer a tax-efficient, simple and flexible way to save money. You don’t pay tax on the interest from a Cash ISA or capital gains from a Stocks and Shares ISA, so you’re not required to declare them on your tax return.

You’re allowed to invest a maximum of £20,000 per year in an ISA or combination of ISAs. You could put half in a Cash ISA and half in a Stocks and Shares ISA. In comparison to pensions, ISAs have no age restrictions limiting you on when you can access your money. This means that you’re granted a better degree of flexibility with your finances – cash can be ready for rainy days or covering immediate spends like holidays or a new car.

Explore more with pensions and ISAs with Wellesley

Using a combination of pensions and ISAs is a smart way to plan your finances for both the short term and long term. Get in touch with our financial advisers today and we’ll guide you through the process.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Please note that Cash ISAs are not available through St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 03/03/2025