Capital Markets Update: July 2019

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

Capital Markets Update


  • In a nutshell
  • Central banks take centre stage
  • US Q2 earnings solid
  • Pound takes a pounding


In a nutshell

Equity markets were mixed in July, with most regions posting muted returns compared to earlier this year. Investors wrestled with a number of issues, including Q2 earnings, central bank announcements and a new Prime Minister in the UK. UK large company equities were the standout performer, driven by a weak Sterling.

Central banks take centre stage

Given the current uncertain economic environment, investors continue to pay close attention to central bankers. At the end of July, the Federal Reserve reduced US interest rates by 0.25%. Whilst the cut was expected, investors were disappointed by the commentary that accompanied the decision. The suggestions that the interest rate cut did not signal the start of a ‘lengthy cutting cycle’, saw equities sell off at the end of the month, an indication that investors were hoping for more accommodative guidance going forwards.

At the European Central Bank (ECB), Christine Lagarde was nominated to take the reins from Mario Draghi as President in November. Lagarde’s appointment was well received by markets, given her perceived dovishness, and political nous. It is hoped that the ECB will now continue Draghi’s ‘whatever it takes’ stance, and deliver a monetary stimulus package later in the year (through further interest rate cuts or asset purchases). European yields fell in July, although some of this was driven by continued weakness in European manufacturing data.

We welcome central bank intervention to try to support the global economy, given the softness of economic data. Given our belief that we are late cycle, we think sovereign bonds are richly priced at this juncture and maintain a slight underweight, in favor of credit.

US Q2 earnings solid

By the end of July, 60% of S&P 500 companies had reported their second quarter earnings. Overall, it looks like US companies have achieved low single-digit earnings growth over the period. Approximately, three-quarters of businesses beat analyst earnings estimates.

We are encouraged by this earnings data, however we think it is necessary to take the information with a pinch of salt given the fact that earnings forecasts had been revised downwards going into the period.

Pound takes a pounding

The British Pound suffered significant depreciation against most major currencies in July, driven by concerns about a No Deal Brexit and further weakness in UK economic data. The Conservative Party’s internal election process concluded in July and as forecast, Boris Johnson emerged the victor. Johnson is attempting to use the threat of a no-deal Brexit to create more leverage in future negotiations with the EU, raising the risk of a disorderly exit on the 31 October. Economic data releases did little to reassure Sterling investors, as retails sales fell in July. Amidst the economic and Brexit gloom, gilt yields continued to tumble.

Multi manager team views

The negative market reaction to Powell’s comments highlights the fragility of market sentiment and importance of Central Bank policy for future market trajectory. Our view is that an element of caution is warranted on equity markets at this juncture. With regards to bonds, we still maintain a preference for credit over sovereigns.

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


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: August 2019. CAM008625.