Capital Markets Update: November 2018

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

Capital Markets Update

  • Fed comments on interest rates
  • US and China talk trade
  • Italian budget and Brexit uncertainty perplexes investors


In a nutshell

The geo-political risks that haunted markets in October didn’t go away in November. But with signs of reconciliation in the air some of those risks might abate. If they do, market sentiment is likely to improve.

November’s news – Fed changes its tune

Jerome Powell, Chair of the US Federal Reserve (Fed), stated that interest rates were “just below the range of estimates of neutral”. This was a change of tone from more hawkish statements in early October that the Fed was some way from neutral, which were designed to convince markets that more interest rate rises were on the way. Markets leapt on the new phraseology and reacted positively in anticipation that the Fed might reduce the number of planned rises. From a market perspective fewer interest rate rises are expected in 2019, which should be supportive of risk assets, particularly shares and bonds.

US and China talk trade

Escalating tensions around trade between the US and China were a dominant issue for investors. At the G20 summit a meeting between China and the US resulted in the announcement of a 90-day ceasefire in which further plans to raise tariffs would not be implemented while talks were ongoing. Markets reacted positively with the US market, in particular, staging a rally that shows how much this issue has weighed on investor sentiment.

Italian budget strikes conciliatory tone

Having initially taken a hard-line stance in response to the European Union’s (EU) rejection of its budget proposal, the Italian government seems to be adopting a more conciliatory tone. This may buy it some time with the EU, but reducing the pension age and implementing income welfare payments while at the same time cutting taxes is a recipe for disaster for an economy already struggling under large debts. A round of debt refinancing is on the horizon. Actions to date are causing yields on Italian bonds to rise and some serious backtracking is going to be required to reverse that trend. It’s possible that the Italian government might well capitulate. Failure to do so could result in disciplinary action, a fine and ultimately expulsion from the EU.

Soft Brexit a better outcome for markets

With less than four months to go, all Brexit options still appear to be on the table. The markets favour as soft a Brexit as possible. If the Brexit deal is approved, then sterling should rise and capital markets should settle a little. There is likely to still be a prolonged period of uncertainty and accompanying market volatility to endure over the following years, as the future relationship between the UK and the EU is determined. Markets may react badly to a rejection of the tabled Brexit deal, which would force MPs to think again and perhaps approve the deal on a second sitting. The markets may not help out if an alternative to a ‘no deal’ remains in play. The biggest fear is that the UK crashes out with a no deal in March 2019. At the moment, the market isn’t pricing in a no deal so there is significant potential for sterling to fall in value should that happen. But any signs of a resolution or the removal of the threat of a no deal entirely should result in sterling strengthening. Recent sterling weakness has been a boon to the UK stock market, particularly the FTSE100 Index, which is populated by global firms with overseas earnings. In the short term, it has also proved a bonus to overseas investments in UK investors’ portfolios. But a weak currency will eventually feed through to the UK consumer and the economy and weigh heavily on both.

Tapering in Europe

Mario Draghi, President of the European Central Bank, reiterated that buying bonds under the programme of quantitative easing to stimulate economic growth would be coming to an end as planned in December 2018. However, he added that “a significant degree of monetary stimulus will be maintained”. There were no surprises in his statement and the euro remained pretty much unmoved.


It has been another difficult month for investors but that isn’t wholly surprising given the prevailing political and economic environment. There is a great deal of uncertainty out there and that is weighing heavily on market sentiment. But many of the geo-political risks have the potential to be resolved and that might well allow markets to move higher for a little longer. The key for investors to determine is where we currently are in the investment cycle. The consensus is that we are at the later stages of the cycle – the point where a slowdown is likely to occur in the near future. The question is when that slowdown is likely to begin and what would cause it. Geo-political risk aside, it is monetary policy that will probably be the main cause and the consensus is that any slowdown arising from the raising of rates in the US is unlikely to happen until 2020. That leaves 2019 as the year to prepare. However, continued uncertainty on the geo-political stage has the potential to hasten that slowdown. Investors will be hoping for the speedy resolution of the US/China trade war.

We remain cautious, given the current environment. We are taking some risk out of our portfolios by reducing holdings that invest in equities and building cash and investments in alternatives to equities. We have added a little to our bond exposures but remain wary of their vulnerability in a period of rising interest rates. The benefits of our multi-asset investment approach should come to the fore in this environment. There will be opportunities if equity markets move higher, but we are also prepared for an eventual slowdown. Market timing is notoriously difficult to anticipate, so staying active in the market and remaining focused on the longer term is critical while we aim to ensure our portfolio is best positioned for the prevailing short-term market conditions.

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: December 2018. CAM07683