Monthly Market Outlook – July 2025

How do we manage the financial risks resulting from war?

The fragile ceasefire between Israel and Iran is holding, and investors are feeling more hopeful that the worst of the conflict may be over. As geopolitical tensions have eased over the last two weeks, renewed optimism has helped lift global stock markets, while oil prices have dropped sharply as worries about supply disruptions have faded. Traditional ‘safe havens’ (assets that investors flock to during times of turbulence) such as gold and the US Dollar have also fallen in value.

Sadly, this geopolitical conflict will not be the last the world faces. While it is not in our remit to count the human cost of conflict, the investment team is qualified to consider the effects on financial markets. The most immediate impacts are typically:

• A rise in risk premiums (meaning a fall in prices) in most directly affected markets.
• Depending on how events unfold, they either see prices quickly recover if a conflict is short-lived, or else a much bigger and wider impact which ripples outwards to other assets if the fighting spreads or drags on.

With so many uncertainties and possible outcomes, how can investors assess these risks, and manage, diversify, or hedge against them? The investment team ast atomos has identified a few key features of armed conflict and how this changes the way they measure and manage financial risk. Here, the team uses the example of the Iran-Israel conflict to explain how this works in practice. 

A combined approach to risk

It’s important to look at both the big picture and how specific assets might be affected by conflict. In the case of Israel and Iran, the most immediate impact was related to risks to future Iranian oil supply. Iranian oil exports make up around 4% of world oil supply, which is significant but not enough to cause a major supply shock in today’s well-supplied global oil market. The oil price rise from $65-$70 in early June to $75 by mid-month was consistent with this view.  

Considering different scenarios

Analysis should include both worst-case scenarios and more likely outcomes. Based on Iran’s broader strategic goals, a short, contained conflict seemed most likely, but the investment team also had to factor in the unknowns and how else things could escalate. What if Iran blocked the Strait of Hormuz, a vital shipping route for oil and gas? Or what if there was a strike on energy infrastructure elsewhere in the Middle East? These risks could drive energy prices higher and put financial pressure on inflation and financial assets more broadly.

Mapping how risks flow through the economy

Conflicts can affect consumers, workers, business, governments and the financial system in different ways. The Israel-Iran conflict was too short-lived for this type of deeper dive economic analysis to be necessary, but the Russia-Ukraine conflict is a good example of why it matters. UK energy prices soared after Russia invaded Ukraine, and at first households shouldered this burden, before the government stepped in with support which was ultimately funded by taxpayers. Each of these stages had different knock-on effects on the wider economy.

Key takeaways for investors from the NATO Summit

World leaders came together at the Hague for the NATO Summit on 24-25 June. NATO stands for the North Atlantic Treaty Organization, a political and military alliance which includes the UK, US, Canada and most of Europe. The annual NATO Summit is a gathering of heads of state and defence ministers to discuss security threats, strengthen co-operation between member countries, and plan security spending.  

One of the main takeaways from the latest meeting was that investment in security is accelerating. Allies have committed to investing 5% of GDP in defence by 2035, a huge increase from the previous spending of 2% of GDP. This equates to a defence budget of roughly $2.7tn. Of this, 3.5% will be devoted to core defence requirements such as troops, weapons, equipment and operations, while the rest will likely be spent on critical infrastructure, logistics and cybersecurity.

Governments are prioritising protecting their nations against an insecure geopolitical backdrop. The rivalry between the US and China, concerns about access to essential products, and vulnerabilities in global supply chains, are all interlinked. These factors are of major concern to world leaders. Now, making economies as efficient as possible is becoming less important than making them more secure.

For investors, this shift could make certain sectors look more important, beyond just aerospace and defence. NATO’s Hague Defence Investment Plan frames security-related investment as more than just military spending – rather, it is spending to “protect our critical infrastructure, defend our networks, ensure our civil preparedness and resilience, unleash innovation, and strengthen our defence industrial base.” As such, Industrials, rare-earth materials, artificial intelligence, and leading-edge semiconductor producers are all clear beneficiaries.

A weaker outlook for the UK

The UK economy started this year strongly, posting 0.7% growth in the first quarter which made it the best-performing G7 country. But much of that growth came from temporary factors, like businesses rushing to export goods and people bringing forward house purchases before expected changes to stamp duty and US trade tariffs. As these one-off boosts faded, signs of weakness appeared, with the economy shrinking by 0.3% in April and both the manufacturing and services sectors struggling. Recent business surveys also show weak demand for new orders and cautious hiring plans. On top of that, uncertainty over US trade policies is still making businesses nervous. The recent UK-US trade agreement has brought some short-term relief, especially for beleaguered car manufacturers, by laying the groundwork for future trade ties between the two countries. Even so, the Bank of England is estimating weak growth of just 0.1% for the second quarter of 2025. 

Job market cools

The UK job market is also showing clear signs of cooling. The unemployment rate rose to 4.6% between February and April, and job vacancies fell to their lowest level since mid-2021. Fewer new jobs are being created, and pay growth has slowed to around 5.3%, with further declines expected. Higher employer costs from National Insurance (NI) increases are also weighing on the jobs market. If this trend in the UK job market continues, it could hurt household spending.

Inflation remains higher than the Bank of England’s 2% target, with annual inflation at 3.4% in May, but underlying trends suggest price pressures are easing. Core inflation, which excludes volatile items like energy, fell to 3.5%, and services inflation dropped to 4.7% in May. Policies such as the employers’ NI hike are likely to keep overall inflation elevated in the short term. But, with falling demand and a weaker job market, inflation could ease further unless we see a sustained spike in energy prices. 

More aggressive interest rate cuts?

The Bank of England kept interest rates at 4.25% in June and is expected to cut rates twice, by 0.25% each time, later this year. However, with the economy looking fragile, the job market softening, and uncertainty over US trade, there’s a real chance policymakers could cut rates faster or more aggressively than markets currently expect. The Bank will likely ignore temporary inflationary pressures to make its next policy decision, due on 7 August. Upcoming economic data will be critical in determining its next move.

US trade policy vs global manufacturing

Uncertainty around US trade policy is making the global economic outlook more unpredictable. Key indicators look more volatile, which in turn makes life harder for central banks trying to balance two tricky tasks – keeping inflation under control while also supporting growth.

Recent data shows that worries over tariffs have caused people and businesses to bring forward spending, making it harder to judge the true state of the economy. For example, US retail sales jumped by 1.5% in March 2025, largely because people rushed to buy cars and other expensive goods before tariffs potentially pushed prices up. Car sales surged nearly 12% that month, but then fell 3.5% in May as demand returned to normal. 

A tough time for carmakers

The car industry has been hit particularly hard by new US tariffs and by the fact that demand for big-ticket items tends to be seasonal. In contrast, sales of other goods have been steadier, although they also dipped slightly in May.

In Japan, factory output grew slightly by 0.5% in May — well below the 3% expected — as exports to the US dropped 11% compared to a year earlier. This was driven by a sharp 25% fall in car exports and a 19% drop in car parts.

The UK’s car industry has also struggled, with vehicle production down nearly a third over the year to May, and car exports to the US falling sharply. However, a new UK-US trade deal which came in at the end of June will cut US tariffs on UK car exports from 27.5% to 10% for up to 100,000 vehicles a year – roughly the number the UK typically exports – giving some relief to British carmakers.

China’s exports to the US also dropped more than 30% in May compared to a year earlier, but overall Chinese exports grew as the country shipped more goods to other markets to avoid US tariffs.

In general, US consumer-facing companies – including retailers, car makers, clothing brands, and luxury goods firms – are especially exposed to economic uncertainty and trade policy changes. These companies rely heavily on global supply chains, making them vulnerable to tariffs. They also often have little ability to raise prices to offset higher costs, which squeezes their profit margins. With US consumer confidence weak, spending on non-essential items could fall further in the months ahead.

Stock highlight of the month: Oracle

Oracle is a US technology company providing software, cloud computing services and IT infrastructure to businesses and governments. Its cloud and licensing business accounts for the majority of sales, around 85%. Cloud infrastructure looks set to be its largest driver of revenue growth over the next few years. Because it has the flexibility to scale up or down, the company has positioned itself as the cloud provider of choice for firms that want a full suite of services but may not have the buying power to entice AWS, Azure or Google Cloud. Oracle is a defensive tech stock because the services it offers are not easy for corporates to turn off, making its revenues stable and its profit margins high. 

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Source: atomos. Information correct as of 3rd July 2025. 

atomos is the trading name of both Atomos Investments Limited (FCA No: 122588, Company No: 2041819) and Atomos Financial Planning Limited (FCA No: 193503, Company No: 3879955), both authorised and regulated by the Financial Conduct Authority and registered in England and Wales. Registered offices: 2nd floor, 5 Hatfields (alto), London, SE1 9PG. 

The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.

This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

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