Capital Markets Update: October 2017

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

Capital Markets Update

  • Abe election win cheers investors
  • US tax reform takes shape
  • UK raises interest rates, Europe holds fire


 In a nutshell

October was a relatively good month for equity performances, which were driven mainly by strong markets in Japan, Asia and the emerging markets, as well as the US. The political backdrop supported investor confidence and improvements in global economic growth. A weakening of sterling further boosted overseas earnings for UK-based investors. Monetary and fiscal policy from governments and central banks remained at the forefront of investor attention.

 Abe arrows ahead

Shinzo Abe’s third landslide general election win and his third term as Japan’s Prime Minister should be good for markets. Japanese equities rallied on the result. Abe campaigned on the continuation of his ‘three arrows’ economic reform programme: easing central bank monetary policies, government measures to stimulate growth, and structural reforms to encourage trade. Further stimulus from the government is expected to offset a planned rise in the sales tax, which should please investors.

No surprise in UK interest rate rise

In a widely anticipated move, Mark Carney, Governor of the Bank of England, announced a 0.25% interest rate increase. Carney suggested that a further two rises of 0.25% over the next two years was all that was likely to be required to get inflation back on track. Sterling fell on the announcement, which benefited the FTSE 100 Index. Bond prices rose as the Bank of England’s forward guidance indicated that it would continue to support economic growth by keeping rates low for longer.

New chairman for Fed

US President Donald Trump opted for a relatively safe choice to replace US Federal Reserve (Fed) Chairman Janet Yellen when her term in office ends in February next year. Jerome Powell has been a Governor at the Fed since 2012 and has been very supportive of Yellen over that period. Powell’s appointment is expected to deliver more of the same, and from a market perspective that should be a pretty good outcome.

US tax cuts on the table

The US Senate passed a budget resolution that paved the way for future tax cuts. At the same time, the Senate enabled a legislative process known as Reconciliation, which reduces the majority required to pass the tax reforms. This should ease the passing of the tax reform bill when it reaches Congress early next year. We still expect the bill to be somewhat diluted from the plan Trump laid out at the beginning of the year.

Europe leaves interest rates unchanged for now

The European Central Bank (ECB) announced it would cut its bond buying programme by half from January 2018, but reassured the markets that it will continue to support economic recovery in Europe. The ECB left interest rates unchanged at 0%.


It’s been said this is the most unloved bull-run in history. The question is whether the market can move higher from here and what factors will drive prices up further. Monetary policy from central banks continues to be supportive, while government-led fiscal policy shows signs of moving away from the austerity measures of recent years. This should be good for both equities and bonds. However, current prices would suggest a lot of the good news has already been priced in, meaning markets could be vulnerable to a correction arising from monetary and fiscal policy errors or geo-political shocks. For now, we feel it is prudent to wait to see how events unfold.

Our portfolios are slightly below our neutral weightings on equities, primarily because of our negative view on the prospects for the UK, particularly the lack of clarity about Brexit. The FTSE 100 Index and UK bond markets have fared well recently due to a combination of a weakened sterling and the Bank of England’s approach to keeping interest rates low, but this may only be temporary in nature.

We prefer European and Japanese equities, while our view on US equities will be guided by the success or failure of the planned tax reform bill. Our view on bonds remains unchanged, namely that a sustained period of rising interest rates will not be good for bond prices. We remain alert to that prospect and are positioning our portfolios defensively accordingly. As a reflection of our more cautious investment approach towards both equities and bonds, we hold a larger proportion of alternative assets and cash than usual.

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: November 2017. CAM06057.