Capital Markets Update: January 2019

Man with coffee

15 February 2019

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

Capital Markets Update

  • Longest US government shutdown finally ends
  • US and China: it’s good to talk
  • US Fed u-turns
  • Stuck in Brexit quagmire
  • China slowdown fears abate

In a nutshell

After a faltering start that extended the difficult end to 2018, things took a turn for the better in January as markets picked up and staged a partial recovery. Despite ongoing geo-political uncertainties the underlying market fundamentals, especially in the US, were positive. There are downside investment risks associated with these geo-political issues, but there is also potential upside, particularly for equities, should any of the issues be resolved.

January’s news – Longest US government shutdown finally ends
The US Government shut down for the second time in Donald Trump’s term as President as Democrats and Republicans in the House of Representatives fought over the budget. This year seemed particularly rancorous, with Trump seeking to raise funds for a wall on the border with Mexico. The shutdown lasted for a record 35 days. At this point, the situation doesn’t look to have been resolved entirely but Trump is now seemingly looking at other means to fulfil his campaign pledge to build the border wall.

US and China: it’s good to talk

The 90-day ceasefire in the US trade spat with China is still in effect. This period in which no further trade tariffs are to be implemented by the US creates some space for negotiations. Markets have been paying close attention to news emanating from those talks and any suggestions from either side that things are progressing well, alongside the potential for an extension to the 1 March deadline, will be received well by investors.

US Fed u-turns

It appeared that the market was right to be sceptical of the US Federal Reserve’s (Fed) hawkish stance that promised further interest rate rises. Fed Chairman Jerome Powell announced a notable u-turn by keeping rates on hold. Equity markets rallied on the announcement, the first time the S&P 500 Index has rallied on the back of a Fed announcement during Powell’s tenure as Chairman, which began in February 2018. Putting a hold on interest rate rises strengthens the market view that there are likely to be fewer than two rate rises this year, as opposed to the four the Fed was planning. This more cautious Fed position reduces the probability of a policy error, where the Fed raises rates too far and tips the economy into recession by mistake. The Fed’s current policy supports both economic growth and market prices.

Stuck in Brexit quagmire

Having delayed a meaningful vote in Parliament in order to gain some concessions from the European Union (EU), which were not forthcoming, Prime Minister Theresa May saw her Brexit deal thrown out of the House of Commons. May took this defeat as a prompt to go back to the EU in search of further concessions on her deal with the intention of returning to the House to put it to the vote again. The uncertainty continues and the prospect of a no deal, or cliff edge Brexit, still remains a possibility. The next key milestone will be the 27 February when the deal is expected to be put before the House once again.

China slowdown fears abate

A great deal of global growth over the years has been down to the expansion of the Chinese economy and so concern over an eventual slowdown has been a perennial one. Those fears abated a little this month as fiscal stimulus measures employed by the Chinese government to manage any slowdown started to feed through to the underlying economy. But China and the surrounding region need the threat of a trade war with the US to be removed.

Outlook

Investor sentiment improved in January but is still very sensitive to the heightened geo-political issues. Recent market weakness offered investors an opportunity to add some risk to their portfolios, but we continue to believe that an element of caution is warranted. Positive developments are being made across the key geo-political issues, but in some instances the outcomes are far from certain and could change dramatically, very quickly.

The current market volatility we are witnessing should create a favourable environment for active fund management, where adopting a diversified investment approach, could be rewarded. We continue to look to manage our portfolios through the inevitable market ups and downs to deliver a smoother investment journey for our clients.

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 2019. CAM007962.