WeekWatch

Investor sentiment drifts between caution and optimism  

Despite ongoing global volatility, the FTSE 100 ended last week in positive territory, supported by the energy sector. This also came despite disappointing economic data for January and rapidly fading hopes of an interest rate cut by the Bank of England (BoE) later this week. 

Consensus expectations that the UK would register a modest economic expansion of 0.2% in the first month of 2026 compared to the previous month failed to materialise. Instead, the economy failed to show any growth at all. The dominant services sector, manufacturing and construction all struggled. If the trend continues, it will be difficult for the economy to grow by 0.3% in the first quarter as the BoE has forecast. 

Optimists point out that investors shouldn’t read too much into one month’s data. In recent years the UK economy has performed well in the first quarter compared to the rest of the year. Yet the US-Iran war, now entering its third week, has complicated an already tentative economic outlook domestically and overseas. Earlier this month, yet too late to take account of the start of hostilities, the Office of Budget Responsibility downgraded its UK economic growth forecast for 2026 from 1.4% to 1.1%. 

Bank of England - unlikely to cut rates

With the price of Brent crude oil up more than 50% in the past month, and ending last week at over $100 per barrel, the BoE is now not expected to cut interest rates when it meets later this week. Even if the war in the Middle East ends soon, the supply disruption is expected to keep energy prices elevated. This feeds into inflation, leading to higher costs for both businesses and consumers. While a cut in UK interest rates would be supportive for consumers and businesses by reducing borrowing costs, the BoE is expected to prioritise inflationary concerns. 

Depending on how events unfold, a worst-case scenario could see the economy slip into stagflation, when low economic growth is combined with higher inflation and unemployment. The last notable period of stagflation in the UK followed the 1973 Arab-Israeli war, when oil prices nearly quadrupled.

Global shocks with Asia particularly vulnerable 

Yet it is not just the UK that is being affected by the energy and geopolitical shocks. Global economic growth expectations were already modest for 2026. Asian economies in particular are vulnerable to the events in Iran. Most of the oil shipped through the Strait of Hormuz is delivered to Asian markets. China, India, Japan and South Korea account for most of these purchases. 

Although it is the world’s largest oil importer, China is expected to be relatively insulated from the near-term volatility in energy prices thanks to its energy strategic reserves. These could support the economy for three to four months. Though Japan is forced to import almost all its oil, it too has a strategic reserve covering the next few months of consumption.  

India and South Korea are also reliant on imported energy. Some analysts are worried that any disruption to the South Korean economy could have a negative knock-on effect for domestic chip production. This reflects the high energy requirements for chip manufacturing (in which South Korea is a global leader) and the country’s high dependency on energy imports. 

Turmoil in markets, but we have been here before

The heightened volatility in financial markets over the past few weeks is a reminder that geopolitics and economic shocks are a regular occurrence in investing. Last year’s “Liberation Day” tariffs, 2022’s invasion of Ukraine and the start of the Covid pandemic in early 2020 are all recent examples of such events. A disciplined approach to diversification both across regions and asset classes can be one of the best ways to deal with short-term negative sentiment. 

Robin Ellis, SJP’s Director of Portfolio Management, emphasises the importance of diversification, discipline and a long-term mindset, highlighting that it’s more often the preparation, ensuing portfolios are diversified before bouts of market volatility that are more important than reactive moves taken during a crisis. He says: “Market events like this are highly uncertain, evolve quickly and cause significant market fluctuations. While tempting, trying to predict how these will unfold so often destroys value over the long term. Looking through the noise, remaining invested and allowing returns to compound over the long term is usually the best strategy in building long-term wealth.”

Lords seek higher limit for pension salary sacrifice

The House of Lords (HoL) has passed an amendment to the current bill on pension salary sacrifice that would more than double the government’s proposed cap.
The government is seeking to limit the tax relief on pension salary sacrifice arrangements to £2,000 per year from April 2029, in the bill currently making its way through parliament.

But the HoL amendment proposes raising the annual cap on employee contributions eligible for full national insurance relief on salary sacrifice from £2,000 to £5,000.

St. James's Place, along with other wealth management and pensions companies, has been lobbying for the proposed £2,000 limit on pension salary sacrifice to be scrapped.

In addition to the revised cap, the HoL has proposed a number of other amendments to the bill, including that basic rate taxpayers be exempt from the cap altogether. It also wants any contributions above the cap to be excluded as income for the purposes of working out student loan repayments.

The proposals to limit pension salary sacrifice have been controversial and strongly opposed by industry leaders since they were set out by the chancellor Rachel Reeves in the Budget in 2025.

Ministers are concerned that limiting national insurance contributions (NICs) tax relief on pension contributions in this way will have a negative long-term effect on pension saving.

If unchanged, the £2,000 cap could affect more people than initially expected, not just those in higher tax rate bands, according to the Office for Budget Responsibility (OBR). The OBR estimates the measure could generate £4.7 billion in revenue for the government in the 2029/30 tax year1.

The bill will return to the House of Commons on 23 March, where the amendments will be considered by parliament.

¹Office for Budget Responsibility - February 2026