Morning Note: Market News, Spring Statement, and Imperial Brands.
Market News
President Donald Trump imposed a 25% tariff on US auto imports from 2 April, prompting investors to pare bets on riskier investments due to concerns about growth in the world’s largest economy. The tariff would apply not only to fully assembled vehicles but key parts. The Mexican peso slipped on the tariff announcement along with shares of automakers such as Toyota, GM, and Ford. Trump floated more tariffs on the EU and Canada if they worked against the US.
Alberto Musalem, a Federal Reserve voting member, earlier warned that the impact of tariffs on inflation may not be temporary. The dollar strengthened, while gold traded up at $3,035 an ounce.
US equities moved lower last night – S&P 500 (-1.1%); Nasdaq (-2.0%) – with AI Beneficiaries down 4% on an FT report the Chinese government is encouraging Chinese groups to build data centres with chips that meet tighter energy requirements not satisfied by Nvidia’s technology.
In Asia this morning, equity markets were mixed: Nikkei 225 (-0.6%); Hang Seng (+0.4%); Shanghai Composite (+0.2%). China’s vice premier pledges more policy support, says economy started 2025 well.
The FTSE 100 is currently trading 0.4% lower at 8,639. Companies trading ex-dividend include BAT (1.91%), M&G (6.20%), Melrose (0.76%), Prudential (1.51%), Smith & Nephew (1.63%), Standard Chartered (1.83%), and Taylor Wimpey (4.12%). Sterling trades at $1.2910 and €1.1990.
Source: Bloomberg
Spring Statement 2025 – Growth Downgraded, Spending Squeezed
Chancellor Rachel Reeves delivered her much-anticipated Spring Statement, providing a state of the economy update, rather than a full fiscal event. While Labour had promised to limit budgets to one per year, today’s statement still carried weight, reflecting a shifting economic landscape and the consequences of policy decisions since last summer.
With growth expectations downgraded, welfare cuts deepened, and departmental budgets tightened, the government is walking a fiscal tightrope—balancing investment with austerity-lite measures to maintain credibility in the markets.
Growth Outlook: A Grim Downgrade
The Office for Budget Responsibility (OBR) has halved its growth forecast for 2025, cutting it from 2% to just 1%. Reeves was quick to express dissatisfaction, insisting Labour is taking “serious action” to get the economy moving. Beyond next year, the numbers aren’t much rosier. The OBR now sees GDP expanding by 1.9% in 2026, before slowing to 1.7%-1.8% in the years that follow. A key focus remains on inflation, which the Chancellor insists must return to 2%, aided by three Bank of England rate cuts since Labour took office.
Fiscal Balancing Act
The Treasury expects the public finances to shift from a £36.1bn deficit in 2025/26 to a surplus of £9.9bn by 2029/30. This fiscal repair job hinges on spending restraint and revenue-raising measures—though tax hikes remain politically off-limits for now.
Welfare: Austerity by Another Name?
Labour’s welfare reforms go further than previously expected, delivering £4.8bn in savings. The Universal Credit health element will be slashed by 50% and frozen for new claimants—moves likely to spark controversy. Meanwhile, £1bn is earmarked for employment support, as Labour attempts to shift more people back into work.
On household finances, disposable incomes are projected to grow by just 0.5% per year over the next five years —hardly a consumer boom. Reeves nonetheless insists households will be “£500 a year better off” compared to previous forecasts.
Defence: A Superpower Ambition
One of the few big spending pledges came in defence, with an extra £2.2bn next year and a commitment to hit 2.5% of GDP by 2027. The government wants to turn the UK into a “defence industrial superpower,” channelling 10% of the MoD’s budget into AI, drones, and advanced manufacturing hubs in Glasgow, Derby, and Newport.
Tax Crackdown: No Rises, But More Scrutiny
Reeves ruled out fresh tax hikes, instead focusing on cracking down on evasion. HMRC will get extra resources to tackle fraud, with a target to increase prosecutions by 20%. The measures are expected to bring in an additional £1bn, bringing total anti-evasion revenue to £7.5bn.
Departments Under Pressure
With public sector reform high on the agenda, Labour is trimming back Whitehall bureaucracy. A new £3.25bn “Transformation Fund” aims to make government “leaner and more agile,” while the NHS will see structural shake-ups to curb costly agency spending. The drive to cut government operational costs by 15%—saving £2bn by 2030—signals further belt-tightening ahead.
Housing: A Bright Spot?
One of the few areas of optimism was housing. The OBR believes Labour’s reforms will push housebuilding to a 40-year high, permanently lifting GDP growth by 0.2% by 2030. To support this, £600m has been allocated to train 60,000 new construction workers, with the rollout of ten “Technical Excellence Colleges” nationwide.
ISA Reform: Steering Savers Invest?
The government is weighing up reforms to ISAs in a bid to nudge more people into investing, according to Spring Statement documents. Chancellor Rachel Reeves stopped short of announcing concrete changes but signalled that a shake-up is on the horizon.
Working alongside the Financial Conduct Authority, the Treasury aims to “give people the confidence to invest” and shift the balance between cash savings and equities.
Speculation ahead of the statement had centred on a proposal to slash the annual cash ISA allowance from £20,000 to £4,000—forcing more capital into stocks and funds. While no immediate policy shift was announced, the Treasury made its intentions clear: it wants to drive retail investment and align ISA rules with Labour’s broader pro-growth agenda.
The official statement read: “The government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.”
For investors, the message is clear: the days of easy, low-risk returns in cash ISAs may be numbered, as policymakers push for a more equity-driven savings culture.
Investor Takeaway: Caution Over Confidence
For markets and investors, today’s statement was a mixed bag. The commitment to fiscal responsibility and growth-friendly policies will play well with bondholders. However, the downgraded growth forecast, and spending cuts suggest a fragile recovery at best.
With interest rates likely to remain on a downward path and no major tax shocks, equity markets may find some reassurance. But for businesses and households, growth remains slow, real wages are rising only modestly, and welfare changes could dampen consumer spending.
In short, Reeves has kept Labour’s economic course steady—but whether this strategy delivers a real boost to the UK economy remains to be seen.
Company News
Yesterday afternoon Imperial Brands hosted a Capital Markets Day at which it set out its strategy to 2030. The plan is expected to deliver another five years of growth in net revenue, EPS, and free cash flow, all of which will continue to drive attractive shareholder returns. The company also provided an update on trading, highlighting it is on track to meet expectations for the financial year to 30 September 2025. Although the company didn’t pull any ‘rabbits out of the hat’, an evolution of what has been a successful strategy should satisfy investors. In response, the shares were little changed.
Imperial Brands manufactures and sells cigarettes, fine cut tobacco, smokeless tobacco, cigars, and next generation products (NGP). The main brands include Winston, Davidoff, L&B, West, and JPS.
The group’s current five-year plan is divided into two distinct periods. The two-year strengthening phase (2020-2022) built the foundation for the current three-year phase (2022-2025) which focuses on the acceleration of returns and sustainable growth in shareholder value. In this phase, the company expects to generate low single-digit net revenue growth and mid-single digit adjusted operating profit growth, defined as 3.5%-6.5%.
The new 2030 strategy builds on the strong foundations of the current plan and has two focused objectives:
- Drive sustainable value in combustibles – the company will continue to focus on its five largest markets – the US, Germany, the UK, Australia, and Spain – which represent 70% of adjusted tobacco operating profit. Within these markets, Imperial has identified specific areas for further investment by category, brand, and sales channel. The objective is to continue to maintain aggregate market share across these five markets with the aim of driving sustainable growth and cash delivery. By applying this same performance-driven, consumer-led approach to the wider portfolio of tobacco markets, Imperial expects them to make a greater contribution to overall performance over the next five years.
- Build scale in next generation products – Imperial has now built a platform for a fast growing and agile NGP business with credible brands in all three categories and differentiated products available in all material markets where the group has distribution routes. Imperial will retain disciplined investment and market entry criteria as it builds a meaningful business with additional growth opportunities and strong profit and cash performance. For now, however, the business remains loss-making with no precise guidance on time to breakeven.
To support the delivery of its strategy, the company has identified further opportunities to create a simpler, leaner, and more agile organisation. These initiatives will also bring efficiencies, with expected annualised savings of c. £320m by the end of 2030, the majority of which will be reinvested to support the growth initiatives. The anticipated cash cost of these initiatives is c. £600m, with the majority of the spend, c. £500m, split between FY2027 and FY2028. In addition, the company expects to incur associated non-cash charges of around £140m. This is a one-off and time-bound programme, and Imperial intends to treat the costs as an adjusting item to aid comparison of performance over time.
The new strategy will support the company’s medium-term guidance with the following CAGR expectations on a constant currency basis: low-single digit tobacco net revenue growth and double-digit NGP net revenue growth; adjusted operating profit growth at around 3-5% annually; adjusted EPS growth at a high-single digit rate, supported by a continued reduction in share count through the share buyback; and free cash flow generation of between £2.2bn and £3.0bn per annum.
The company is retaining the same capital allocation framework, with investment in organic growth initiatives in combustibles and NGP, while continuing to evaluate opportunities for small bolt-on acquisitions, which will be focused on enhancing NGP capabilities. The capital intensity of the business will remain low with modest annual capex needs of £300m-£350m.
The company will maintain a strong and efficient balance sheet to support its investment grade credit rating. It will maintain the current leverage target at the lower end of the net debt to EBITDA range of 2-2.5 times. Note that at the end of the last financial year to 30 September 2024, the group had net debt of £7.7bn and financial gearing of 1.8x net debt to EBITDA. The all-in cost of debt modestly decreased from 4.3% to 4.2%, while interest cover was a comfortable 10.5x.
The company will continue with its progressive dividend policy to provide a reliable, consistent cash return to shareholders. Dividends per share will grow annually taking into account underlying business performance. The current yield is just below 7%. Surplus capital will continue to be returned to shareholders via an ongoing, ‘evergreen’ share buyback over the five years to FY2030. The Board will determine the quantum of future buybacks on an annual basis, in line with current practice but has said they will be ‘material’.
Imperial is currently undertaking a £1.25bn buyback, expected to complete no later than 29 October 2025. Taking dividends and the buyback together, the company expects underlying capital returns to shareholders in FY2025 will amount to c. £2.8bn, 12% of its current market capitalisation. Overall, the group is on track to deliver five-year capital returns of c. £10bn, representing 67% of its market capitalisation in January 2021 when the strategy was launched.
This morning, the company published its long-term incentive plan performance measures and targets. We note a 40% weighting has been given to EPS growth but that, encouragingly, the target excludes the accretive benefit of the company’s share buyback programme.
Finally, the company also disclosed it is on track to deliver full-year expectations for the financial year to 30 September 2025. It expects to deliver tobacco and NGP net revenue growth of low single-digit in constant currency and to grow group adjusted operating profit close to the middle of the mid-single-digit range at constant currency (i.e. at a similar growth rate as last year). In line with previous years, performance will be weighted to the second half of the year, driven by the phasing of combustible pricing and investment, with first-half adjusted operating profit expected to grow at low single digits at constant currency (i.e. 1%-2%). The company expects to deliver at least high-single-digit EPS growth for the full year and sustainable growth in cash flow.
Source: Bloomberg