The week that was …
Economic round-up
Japan stocks soar on Takaichi election win
Japanese stocks jumped to all-time highs as investors bet on prime minister Sanae Takaichi’s ability to stimulate economic growth. Takaichi scored a decisive victory in the general election and a ringing endorsement of her expansionist fiscal policy. Read more in ‘In focus’ below and from Reuters here
Tariff boost to US deficit
Tariff receipts of $124bn (£91bn) have helped reduce the US government’s deficit for the fiscal year to date, with the country collecting $30bn in January alone. The government is still waiting for the Supreme Court decision on whether tariffs are legal in their current form. Read more from CNBC here
‘More to do’, says Reeves
UK chancellor Rachel Reeves has said there is “more to do” after the country’s economy saw anaemic growth in the final months of 2025. The UK economy grew 0.1% in December, bringing growth to 1.3% for 2025 as a whole. This was ahead of analysts’ forecasts and ahead of most European peers. Read more from the BBC here
US inflation eases
US inflation fell more than expected – to 2.4% in January, down from 2.7% in December – leaving scope for the Federal Reserve to cut rates this year. The fall was attributable to a drop in petrol prices and a deceleration in housing-related costs. Read more from the FT here
UK retail spending jumps …
In a sign of growing confidence in the wake of the UK’s November Budget, growth in retail spending more than doubled from December to January as shoppers made the most of the January sales. The value of retail sales increased at an annual rate of 2.7% in January, up from 1.2% in December. Read more from the FT here
… but US retail sales weak
US retail sales were unexpectedly poor in December, suggesting weakening consumer confidence. Retail sales were unchanged from the previous month, after a 0.6% increase in November, with economists pinning the blame on a faltering labour market, persistent inflation and cooling wage growth. Read more from the BBC here
Markets round-up
AI fears weaken
S&P 500 US stocks rose in volatile trading on Friday but remained down for the week. Some areas were buoyed by weaker inflation data, which raised the likelihood of an interest rate cut. The technology sector still suffered, however, putting the S&P 500 and the Dow on track for their worst weekly loss since November. Read more from Reuters here
Schroders and Nuveen agree deal
Schroders and US manager Nuveen have agreed a £9.9bn ‘megadeal’, bringing to an end the independence of one of the UK’s oldest asset management groups. The combined group will have around $2.5 trillion in assets. The Schroders business will retain its brand and its presence in London. Read more from the FT here
Wealth managers hit by AI concerns
UK wealth managers were the latest group to feel the heat of AI disruption last week. Shares in the UK’s largest wealth managers fell on concerns about potential disruption from a new AI-led investment tool from US-based fintech Altruist, with fears this would undermine more traditional wealth offerings. Read more from the FT here
Anthropic doubles in value
AI leader Anthropic has raised $30bn in its latest funding round – a move that has helped the business more than double its existing valuation to $380bn. Read more from Reuters here
Trump scales back commodities tariffs
US president Donald Trump is planning to scale back tariffs on steel and aluminium goods, with the aim of addressing the country’s domestic affordability crisis. He had hit steel and aluminium imports with tariffs of up to 50% last summer, which has raised the cost of goods such as washing machines and ovens. Read more from the FT here
“Smallcaps have spent a long time in the wilderness but there are signs they are starting to re-emerge – particularly where countries have started to cut interest rates.
Selected equity and bond markets: 06/02/26 to 13/02/26
| Market | 06/02/26 (Close) |
13/02/26 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5580 | 5622 | +0.8% |
| S&P500 | 6932 | 6836 | -1.4% |
| MSCI World | 4529 | 4510 | -0.4% |
| CNBC Magnificent Seven | 406 | 393 | -3.2% |
| US 10-year treasury (yield) | 4.22% | 4.05% | |
| UK 10-year gilt (yield) | 4.51% | 4.42% |
Investment round-up
AI advice gains ground in UK
An estimated 2.7 million UK adults are using AI tools for advice on money, savings or investments, according to a survey by BrokerChooser. The platform also found more than half of these were willing to act on the advice they were given.
AIC urges action over Saba
The Association of Investment Companies has written to the UK government and Financial Conduct Authority, urging it to “get to grips with the threat” it believes activist hedge fund Saba Capital poses to investment trusts. Saba recently said it would use the upcoming AGM for Baillie Gifford’s Edinburgh Worldwide investment trust to vote against the re-election of the existing board.
European active ETFs lose market share
The European active exchange-traded fund market hit €78.4bn (£68.2bn) by the end of 2025, according to Morningstar data – up from €52.5bn the previous year. Its overall market share has been falling, however – from 7.8% of all ETF flows in 2024 to 6.6% in 2025.
Apollo GM launches two LTAFs
Apollo Global Management has launched two long-term asset funds in the UK, investing in private markets and credit. The two funds were authorised by the FCA on 11 February.
Most AGI funds found to offer ‘good value’
In the latest Assessment of Value report, most Allianz Global Investors UK funds were judged to be providing good value. All 16 of its UK funds received either an amber or green overall rating, which indicates value or good value.
Quilter Foundation supports financial education
The Quilter Foundation has renewed its focus on financial education in the UK, pledging £3m to the cause over five years, including £1m in grants to a variety of charitable organisations.
Rathbones enjoys clean sweep in AoV report
All of Rathbones’ 28 funds received a green rating in its latest assessment of value (AoV) report, meaning they are offering good value to investors.
… and the week that will be
AI ructions
US stockmarkets will be on their guard for further artificial intelligence disruption this week, as they look to judge whether the recent rout is a short-term setback or something more serious. Earnings numbers are also due from Walmart, which recently passed the $1tn market capitalisation mark, plus a range of economic data. Read more from Reuters here
Board of Peace to meet
Donald Trump is set to unveil his reconstruction plan for Gaza and details for a UN-authorised stabilisation force as part of the first formal meeting of the new Board of Peace in Washington. It may soon start to become clearer therefore whether the board is seen as an adjunct to or replacement for the UN. Read more from the FT here
The week in numbers
US economy: Consensus expectations are for the latest flash reading to show US GDP growth slowing to 3% in the last three months of 2025, from 4.4% the previous quarter.
UK inflation: Consensus expectations are that UK prices will be up 3% year-on-year in January, down from 3.4% the previous month, with core consumer prices up 3%, down from 3.2% in December. Headline inflation is expected to drop 0.1% month-on-month.
UK jobs data: Consensus expectations are for the December UK unemployment rate to hold at 5.1% while average earnings are forecast to rise by 4.4%, down from 4.7% the previous month.
UK business sentiment: The flash February reading of the UK manufacturing purchasing managers index (PMI) is expected to fall to 50.9, from 51.8 in January, with the services equivalent falling to 51.6 from 54.
Eurozone consumer confidence: Consensus expectations are that the flash February reading of the Eurozone consumer confidence index will fall to -12.8 from -12.4.
German economy: The ZEW index of economic sentiment in Germany is expected to fall to 57 in February, from 59.6 the month before.
Germany business sentiment: The flash February reading of the German manufacturing PMI is expected to rise to 49.8 from 49.1in January.
Japan inflation: Headline CPI inflation in Japan is expected to slow to 1.9% in January, from 2.1% the month before, and core inflation to weaken to 2.3% from 2.4%.
In focus: Small revolution
Smaller companies have struggled for attention in a world where ‘megacap’ tech stocks seemed to offer investors similar growth potential but without the complexity. That said, they have looked ready for a reappraisal for some time, on the back of low valuations and an increasingly accommodative monetary and fiscal environment. Investors’ principal fear was smallcaps could prove vulnerable to any weakness in their larger counterparts – yet early signs suggest they may be a beneficiary.
The underperformance of smaller companies has been evident in the UK, the US, Europe and Japan and the MSCI World Small Cap index has made an annualised return of 13.8% over the past three years – more than five percentage points behind that of the MSCI ACWI index.
This weakness was still in evidence in 2025. Not only did the US market continue to become increasingly concentrated in a handful of largecap stocks – the top 10 companies in the S&P 500 now form almost 40% of its market capitalisation – the FTSE 100 notably outpaced the FTSE 250 and Small Cap indices. Indeed, at 25.8% the return from the FTSE 100 was almost twice that of the 13% rise in the FTSE 250. While the FTSE All-Share has a greater spread of sectors than the S&P 500, it still has 41.61% across its top 10 names.
The UK and Asian markets had their own equivalents of the ‘magnificent seven’. In the UK, it was the banks and defence companies – with HSBC, Barclays and Rolls-Royce rising 48%, 75% and 106% respectively over last year. In Asia, meanwhile, TSMC and Samsung rose 54% and 104%.
In Europe, however, the pattern was different – and this may have set a pathway for other smaller companies markets to follow. “2025 marked the first year of smallcap outperformance versus largecaps since 2020,” says George Cooke, manager on the Montanaro European Smaller Companies Trust.
“Valuation support is compelling, with smallcaps trading at a near all-time low P/E discount to the broader market. History suggests that periods of such pronounced style divergence are often followed by a more balanced environment, in which fundamentals and stock selection play a greater role in driving returns.”
The recently enacted One Big Beautiful Bill Act has helped ignite economic activity – particularly through increased government spending and incentives for domestic investment.”
Smaller companies have certainly made a flying start to 2026. The average North American and UK Smaller Companies fund is up 5.2% and 4.2% respectively. Perhaps more importantly, smallcaps do not appear to have been caught up in the ongoing flight from AI stocks. To date, the sell-off in technology has not broadened out into a wider ‘risk-off’ trade that would incorporate small caps.
The immediate catalyst appears to have been a change in monetary policy. It is notable that European smallcaps performed in line with their largecap peers in 2025 – and the European Central Bank has been cutting rates since mid-2024. The Federal Reserve and Bank of England have both cut rates over the past few months and further cuts are expected from both.
It is not just the anticipation of a more benign macroeconomic environment that is driving smallcaps, however. “After falling sharply for almost three years, smallcap earnings began to rapidly improve in late 2025,” points out Timothy Murray, capital markets strategist at T Rowe Price.
“While trailing 12-month earnings versus the S&P 500 fell 36% from the end of 2022 through to 19 September 2025, they rebounded 27% through to 27 January 2026, leaving them only 19% lower than their 2022 peak. This earnings inflection represents a meaningful shift from the past several years, when deteriorating fundamentals were a persistent headwind for smallcap performance.”
Smallcaps are also likely to benefit from fiscal stimulus in the US and Europe. “Fiscal stimulus is beginning to provide support,” says Murray. “The recently enacted One Big Beautiful Bill Act has helped ignite economic activity – particularly through increased government spending and incentives for domestic investment. While the near-term impact appears modest, the effects are likely to become more pronounced as we move further into 2026, providing an additional tailwind for smallcap earnings.”
As for Europe, Julia Scheufler, portfolio manager on the European Smaller Companies Investment Trust, says increasing commitments to infrastructure and defence spending are filtering down into smaller businesses, such as component makers, digital infrastructure groups or advertising companies benefiting from increased spending.
Investors may well turn to this part of the market as a source of growth if disillusionment with the AI trade continues to grow. It would not take a significant reversal in inflows for global smaller companies to see a change of fortune.”
In the UK, meanwhile, valuation remains the most compelling argument for smaller companies. Simon Murphy, manager of the Tyndall Unconstrained UK Income fund, points out the yield on midcaps is now well ahead of that of the FTSE 100. “While there were a couple of brief periods where the Mid250 yield rose above the FTSE 100 yield in 2023 and 2024, the consistency of this yield premium remains a historic anomaly,” he adds.
Japan is the one major market where interest rates are rising – and bond yields could rise further still if prime minister Sanae Takaichi follows through on her spending plans. More positively for domestic companies, this may be offset by fiscal stimulus and domestic economic growth.
Japanese smallcaps had lagged for some time but did enjoy a better year in 2025, with the MSCI Japan Small Cap index rising 34.2% over the past year, compared with 31.2% for the MSCI Japan (to 31 January, in US dollar terms). Nevertheless, they are still behind over three and five years.
“Prime minister Takaichi has been explicit in backing corporate governance reform, productivity enhancement and policies that encourage capital efficiency,” notes Nicola Takada Wood, managing director, Japan at Asset Value Investors.
“The larger end of the market has seen the benefits of these reforms and we are now seeing these tailwinds increasingly trickle down to small and midcap companies through higher domestic demand, better pricing power, improved balance sheet discipline and more shareholder-friendly behaviour.” The AVI Japan Opportunities trust has around 60% in sub-$1bn opportunities.
Smallcaps have spent a long time in the wilderness but there are signs they are starting to re-emerge – particularly where countries have started to cut interest rates. Investors may well turn to this part of the market as a source of growth if disillusionment with the AI trade continues to grow. It would not take a significant reversal in inflows for global smaller companies to see a change of fortune.
Read more on this from Franklin Templeton here
In focus: Mens Sanae
The Nikkei index soared last week as Sanae Takaichi scored a decisive victory in the Japanese general election of 8 February. Investors are hoping her expansionist plans will juice the economy, creating a benign environment for corporate Japan. Nevertheless, question marks persist over whether her pledges are achievable.
Takaichi stood on a mandate of ‘spending for growth’ – for example, she promised a two-year suspension of consumption tax on food, a measure that will cost the government an estimated ¥5tn (£23.4bn). She has also committed to providing support for certain sectors, including technology and defence.
“Her pro-growth stance, emphasis on revitalising domestic consumption and clear support for private enterprise should help reinforce ‘animal spirits’ that are already showing signs of recovery across parts of the economy,” maintains Nicola Takada Wood, managing director, Japan at Asset Value Investors. “A stable political backdrop matters in Japan, and this result lowers uncertainty for companies making medium-term investment and hiring decisions.”
Stockmarkets do appear convinced. The Nikkei is up 12.9% since the start of the year as investors anticipate a more benign environment for companies to grow their profits. Perhaps more surprising, though, is how bond and currency markets have been relatively relaxed about her victory. In spite of some wobbles at the start of the year, yields on long-dated Japanese government bonds have been stable over the past week.
It is possible they are assuming Takaichi’s ambitions will be tempered by reality. She has repeatedly stressed that her stimulus plans will not blow out the nation’s finances. Alternatively, it may also be a response to apparent political stability.
As Takada Wood puts it: “Takaichi’s win should put a stopper on the revolving door of leadership – namely four prime ministers in five years – and provide political coherence and continuity at a time when households and corporates have been looking for a stronger signal on the direction of economic policy.” Takaichi’s win also means her LDP party will not need to forge deals with opposition parties that may have forced even larger fiscal stimulus on her.
Nevertheless, economists are still wary of the so-called ‘Takaichi trap’ – where the prime minister raises public spending to address cost-of-living concerns but, in doing do, undermines the currency and thereby lifts inflation. Even if everything looks rosy for now, Japan’s debt burden and historically slow growth levels do leave it vulnerable here. In the longer term, this should be a concern for equity investors.
