Capital Markets Update: January 2017

  • Trump loosens regulatory restrictions to boost business
  • Markets positive – but for how long?
  • Brexit still spells uncertainty for investors
  • Bond sell-off

 

 

In a nutshell

It’s no surprise that 2017 has so far been all about Donald J Trump. The new US president wasted no time in issuing a series of executive orders to fulfil his election promises. For the banking sector, one of the most significant of these was the promise to relax regulations. Markets had enjoyed a strong rally since Trump’s election victory, but the ‘honeymoon’ could now be coming to an end. In the UK, the lack of detail about the process to leave the European Union (EU) continued to frustrate investors and businesses.

Trump loosens regulatory restrictions to boost business

One of the big executive orders Trump signed seeks to lighten the regulation currently imposed on the financial services industry. A review of the Dodd-Frank Act, and the Volcker Rule contained within it, is on the cards. The Act was introduced in the wake of the 2008 financial crisis to reduce the risks inherent in the financial system and prevent another crisis. The Volcker rule prevents investment banks from engaging in trading activity on their own accounts, which is known as ‘prop trading’. It also demands that banks increase their cash reserves as a buffer in tough times.

Obama’s fiduciary rule about investment advice, which has not yet been put into effect, may be stalled indefinitely. The rule demands that pension advice should be in a client’s best interest with all conflicts declared. The potential for a lighter touch approach to banking regulation in the US has led to anticipation that Europe may follow suit. Share prices in the main UK high street banks rose as a result.

Markets positive – but for how long?

Equity markets rallied following Trump’s election, buoyed by the prospects of lower taxes, deregulation and fiscal stimulus with the key sectors that would benefit most (financials, consumer discretionary, energy) enjoying the greater gains. Equities find themselves in a ‘sweet spot’, with fiscal stimulus measures combining with loose monetary policy, as is currently taking place in the US. However, the rally could be running out of steam, and investors are taking a pause for breath and a reassessment. Some form of market correction in the near term would not be surprising. There is probably enough strength in the US economy to support the view that markets could recover from any short-term shock.

Brexit means…

In the UK, Brexit continued to dominate headlines, but the Government’s plans are still far from clear. GDP growth for the last three months of 2016 was higher than expected, at 0.6%, and the Bank of England opted to keep interest rates on hold.

Bond sell-off

The sell-off by investors of government bonds across the developed world seems to be continuing with yields increasing (and prices falling). We’ve been wary of the bond market for some time and it feels as if the market is moving towards our way of thinking. But it won’t take much from Trump to drive investors back to the relative safety of US – and possibly even UK – government bonds.

 

Outlook

There is a great deal of uncertainty on the horizon. Trump, Brexit and forthcoming elections in Germany and France all present risks this year, and would suggest an element of caution is warranted. For the moment, investors seem prepared to look beyond those risks and seek out the positives. Central banks in the UK, Europe and Japan remain supportive of their economies, which are improving. But this is no time for investors to be complacent.

Our continued cautious outlook means that investment activity was limited in January, and our portfolios remain largely unchanged. Where we hold funds that invest in government bonds we are seeking positions that are less sensitive to interest-rate changes in anticipation of an environment of rising yields. We have maintained our preference for corporate bonds funds over government bonds. We have also maintained our cautious approach to equities, which reflects our concern that equity valuations are currently too high and need some strong earnings growth to be justified. Cash in our portfolios is higher than usual, having taken some profits in rising equity markets and we’re holding cash with a view to buying back in at lower price levels if we see markets fall back.

Oliver Wallin, Octopus Investments

e: owallin@octopusinvestments.com

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: February 2017. CAM04773.