Capital Markets Update: May 2017

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

Capital Markets Update

  • UK General Election results in hung parliament
  • Investors cautious about UK markets
  • Vive la République
  • Markets warm to pro-European German leaders

In a nutshell

Investors nervously eyed safe haven assets and UK market uncertainty intensified following Theresa May’s calamitous election campaign and the resulting hung parliament. European markets offered some respite, but this was tempered as Greece’s debt problems resurfaced.

Hang it all

Prime Minister Theresa May called a snap general election to strengthen her hand in Brexit negotiations for the UK to leave the European Union (EU) and to support her mandate for a ‘hard Brexit’. However, the voting public had other ideas and, having broadly accepted the inevitability of Brexit, seemed more concerned with bringing an end to ‘austerity politics’. A chastened prime minister may be forced to be more inclusive in her leadership regardless of any deal she may strike with the Democratic Unionist Party (DUP). A softer Brexit, where the UK maintains access to the European common market while accepting the associated compromises, is potentially back on the table. Alarmingly, we’re already three months into the two-year notice period accorded by Article 50 for leaving the EU.

Investors cautious about UK markets

The FTSE 100 Index rose as many international companies benefited from the fall in sterling, itself a consequence of a weakened Government. Yields on government bonds fell as investors sought sanctuary in these so-called safe assets. Austerity policies could well be replaced with policies to stimulate economic growth. The natural long-term consequence of which would be an increase in national debt. Uncertainty about what course of action the Government will take in the near term means investors are approaching UK markets with caution.

Vive la République

While May’s star may be on the wane, French President Emmanuel Macron is making dramatic progress. He is fulfilling his promise of fielding a candidate in every constituency for June’s legislative elections and the prospects for his renamed La République en Marche party look good. Macron’s progress has been well received by investors. Market sentiment has looked favourably on his pro-European stance and the belief that victory in these elections will mean he can successfully pursue his agenda. It will not necessarily be such a good result for the UK, though. Macron’s pro-European position is expected to result in a harder line taken against the UK in Brexit negotiations as he seeks to build closer ties to Germany in pursuit of a closer EU.

Markets warm to either German winner

In Germany, Chancellor Angela Merkel’s position seems to be strengthening ahead of the federal government elections in September. Merkel is a known quantity, and this would make her the preferred candidate as far as the market is concerned. European corporate earnings looked healthy, with 63% of companies beating forecasts in the earnings season for the first quarter of 2017. There is a strong case for investors to be more positive about Europe.

Greece is the word

Eurozone finance ministers and the International Monetary Fund (IMF) failed to agree terms on the country’s debt relief. The German government believes Greece is being too optimistic and is demanding further austerity measures be imposed. Yields on Greek debt increased as a result, causing bond prices to fall.


The US Federal Reserve is expected to raise interest rates again in June. This will result in the US dollar strengthening, particularly against sterling. Donald Trump’s US presidency continues to introduce uncertainty, and the sacking of James Comey as director of the Federal Bureau of Investigation has led to ‘Watergate’ comparisons and the potential to see a US president impeached. Meanwhile, we still await further details on the US Government’s promised tax reforms. News on tax reform might well add renewed vigour to US equity markets.

Overall, we still believe an element of caution is warranted. Political uncertainty in the US and UK has led us to take a slightly negative view of equities, except for European equities. We need to see stronger company earnings in the US to justify current market levels, and clear progress on tax reform in order to assess the potential for a move higher. We also need greater detail on Brexit negotiations before we change our view in any significant way on the prospects for the UK. For bond investments, we retain our preference for corporate debt over government-issued bonds. Higher quality corporate debt in companies with strong credit ratings is our preferred option as we look to reduce overall risk in our portfolios.”

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: June 2017. CAM05265.