Capital Markets Update: April 2018

For professional advisers only. Not to be relied upon by retail investors.

Capital Markets Update

  • US steely determination and China’s tariff retort
  • Mixed signals for interest rate rises
  • Corporate results looking strong

In a nutshell

US President Donald Trump’s protectionist stance remained at the forefront of investors’ minds in April. Market volatility continued to be driven by concerns over the pace of interest rate rises, worries about the performance of specific tech stocks, and signs of slowing global growth. On the other hand, the corporate results reporting season showed relatively healthy earnings for investors.

March’s news – Trump’s steely determination

Trump extended exemptions until June for favoured nations and allies to allow time for negotiations on the levy of a 25% tariff on steel imports and 10% on aluminium. South Korea appears to have got off relatively lightly, avoiding the tariff permanently with an agreed reduction in the amount of steel it exports to the US. French President Emmanuel Macron and German Chancellor Angela Merkel visited the White House in April, but there were no deals announced from either leader.

China’s tariff retort

Trump’s list of tariffs covered over 1,000 items, targeting over $60 billion of Chinese exports to the US, and was aimed at high-tech and industrial sectors where China wants to be a world leader. China’s response was seemingly intended to inflict the maximum political pain on Trump, with a list of possible retaliatory tariffs directed towards agricultural goods produced in rural areas in the Trump voter heartlands. No single country is going to win against the US in a trade war, given the size of the US trade deficit, although mutual economic damage is a certainty. Trump has shown an appetite for making deals, so concessions on all sides are likely to be made.

Mixed signals for interest rate rises

The UK’s GDP growth for the first quarter of 2018 was very weak at 0.1%. The finger of blame was pointed at the weather and the ‘beast from the east’, in particular. But a fall in consumer credit levels, slowing global growth in Europe and globally, and a reduction in manufacturing output, are also contenders for slowing UK GDP growth. As a consequence of this weak data, it appears unlikely that Mark Carney, Governor of the Bank of England, will raise interest rates in May. He will probably wait to determine whether weak growth was only a temporary weather-related blip and will no doubt also seek evidence of further progress on Brexit talks before making any decision.

In the US, the favoured inflation measure (which excludes food and energy) rose strongly. This brought core inflation closer to the US Federal Reserve’s (Fed) 2% target. Combined with the record-breaking low unemployment rate, it strengthens the case for the Fed to raise rates a further three times this year as planned.

Corporate results looking strong

Loose monetary policy and fiscal stimulus through US tax reform are no doubt contributing to what is turning out to be a strong corporate earnings reporting season. This is adding further support to share prices in the US. Price movements haven’t been big, suggesting investors have already priced in good company performances. However, better than expected corporate earnings can only help support the case for equities.


Fears of a damaging trade war between the US and other countries seem overblown and there are signs that these fears will fade once deals are struck and exemptions confirmed. The tech stock wobble has been overcome with those stocks in the forefront of concerns, Facebook, Tesla and Amazon, recovering strongly. Global growth is showing signs of slowing but remains positive. Trump’s fiscal stimulus is still feeding through and the US Federal Reserve’s (Fed) monetary policy remains supportive.

All this provides a strong case to suggest the current equity market bull-run has a little more life left in it. It will likely be a bumpy ride for investors and resolve will be tested. The bull-run must come to an end at some stage but that might not happen for a while. Much will rest on how long investors are prepared to hold on before nerves get the better of them.

We remain cautious participants in any rise in equity markets. But we are very conscious of the need to adopt more defensive investment strategies the longer the equity bull-run continues. With market volatility up, passive investing is likely to be less profitable. Instead, this environment should benefit our holdings in actively managed funds as they seek to exploit the increasing disparity of returns among companies within market indices. However, we will be looking to use passively managed investments to help smooth the anticipated market volatility for our investors, by trading through the ups and downs, selling on rises and buying on dips. Meanwhile, the bond market is becoming a little more attractive as falling prices offer better yields. We remain alert to interest rate rises though, which are the key risk to the bond asset class at present.

Oliver Wallin, Octopus Investments


t: +44 (0)20 7776 3153


Important information:

For professional advisers only. Not to be relied upon by retail investors. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: May 2018. CAM06937.