Capital Markets Update: March 2018

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

Capital Markets Update

  • US protectionism and tariffs increase
  • US tech companies suffer
  • Italian coalitions and Brexit transitions


In a nutshell

After a small relief rally early in March, equity markets fell back once again to February’s lows. Having witnessed a market correction in February, investors were perhaps understandably more risk aware and averse. US President Donald Trump’s focus on trade and a spat with China didn’t help matters. US technology companies suffered a series of upsets that affected investor sentiment. Perhaps as a result of increased risk aversion, bonds fared better and delivered a positive return (in sterling terms).

March’s news – Protection racket

Having succeeded in passing his tax reform, Trump moved to the next phase of his agenda to ‘Make America Great Again’ by seeking to redress the balance of trade in its favour. This is a popular policy among the Republican voter base. After January’s import tariffs on washing machines and solar panels, Trump added steel and aluminium imports to the list. Trump clearly has China in his sights as both Europe and Canada, the two largest sources of US steel and aluminium imports, were excluded from having tariffs imposed. China is a large steel producer but exports relatively little to the US. It is the volume of production that is important, as over supply lowers the global price of the material concerned. As a result, this move is unlikely to revive the fortunes of the US steel and aluminium industries.

Tariff tally mounts

Trump also drew up a list of over 1,000 products on which he intends to levy import tariffs, while targeting $60 billion of tariffs specifically on Chinese products. Intellectual Property is a key issue with the US conscious that China is not recognising (or paying) sufficiently for US innovation. China has responded and the sabre rattling has spooked markets, wary of the impact of a trade war on global economic growth. However, it will be the US, with its huge trade deficit with China that will fare better if the two countries engage in an all-out trade war. But it is hard to see matters escalating to that point. Trump is seemingly too dependent on the fortunes of the stock market as a marker of his success as president. As we’ve seen from March’s market movements, the stock market has clearly shown what it thinks of trade wars. A small skirmish should be sufficient to satisfy both Trump and his supporters for now.

Tough time for tech

March saw a turn in fortune of US technology companies that no doubt prompted some profit taking by investors. Both Uber and Tesla experienced fatalities with their self-driving car prototypes, which set back their growth plans (and share prices) as they suspended further trials for the time being. Tesla continued to struggle to meet its car production targets. Trump questioned Amazon’s business model by suggesting the US Postal Service was acting as its ‘delivery boy’. And Intel shares were hit by Apple’s decision to bring its chip production in-house.

Transition window opens for Brexit

Sterling rallied on news that the UK and Europe had agreed to a transition period, buying some time for both sides beyond the official Brexit date of 29 March 2019. Fears of a hard or cliff-edge Brexit have abated and there is relief that some progress in negotiations is being made. But there is still a long way to go and there remains very little clarity around what the future relationship is likely to look like.

Parties squabble of Italian coalition leadership

We are still to see what form the Government is likely to take in Italy. The various parties continue to squabble among themselves as to the shape of the coalition and who should lead it. With the largest share of the vote, it seems the Five Star Movement has the greater claim. Who it ultimately chooses to partner with will have a large bearing on Italy’s view of the European Union. The scene seems set for Italy to be testing Germany’s resolve on austerity politics.


Increased investor risk aversion, Trump’s sabre rattling on trade, and pressures on the US tech sector all contributed to March’s market volatility. The question is whether these factors are set to weigh heavily on markets going forward. Continued loose monetary policy intended to stimulate economic growth, increased fiscal stimulus, and improving global growth combine to provide strong underlying fundamentals that should provide ongoing support for equity markets over the coming months.

There are reasons to be cautious and we continue to be so, a position that has been rewarded over recent weeks. But there are also positives to be drawn from the current environment. Trump’s actions continue to be a risk on the geo-political stage, in terms of a potential full-on trade war with China and military intervention in Syria. However, the probability of the former is low and the impact of the latter on markets is likely to be minimal. Central bank action on interest rates remains a key influencer of market activity but the signs are, at present, that any rises will be implemented in a controlled and managed manner. We remain alert, looking to exploit any short-term market movements, while we expect further volatility in markets over the short term.

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: April 2018. CAM06847.