Capital Markets Update: October 2018

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

Capital Markets Update

  • Multiple issues trigger market upheavals
  • IMF wary on growth
  • US Fed and President Trump talk tough
  • Politic talk in Italy and UK unsettle markets

 

In a nutshell

October proved to be a difficult month with most major markets experiencing a significant sell off and few places for investors to hide. The International Monetary Fund (IMF) issued its bi-annual report and with it, a downgrade in global growth expectations. In the US, the Federal Reserve (Fed) continued to talk tough and President Donald Trump was equally determined to escalate his trade war with China. In Europe, Italy’s controversial budget and the UK’s muddled Brexit preparations added to market uncertainty.

Red October

When we see sharp market corrections like those experienced this month it is typical to want to point to a single catalyst but there is far too much going on at the moment to pinpoint one specific trigger. Instead, a combination of issues and ongoing concerns currently weigh on investor sentiment.

Has global growth peaked?

The International Monetary Fund released its biannual World Economic Outlook report, in which it projected global expansion would continue while forecasting a global economic growth rate of 3.7% in 2019. That is a downgrade of 0.2% on its previous report and has invited speculation that global growth has peaked.

US Fed draws a line

The US Federal Reserve (Fed) continued its hawkish tone, determined to get the market to accept its current projected path of interest rate rises. An interest rate rise of 0.25% in December looks likely, with a further four rises scheduled for 2019. The danger is that the Fed raises rates too far and too fast and as a result inadvertently draws the US economy into recession.

Trade wars loom

The impact of the trade war between the US and China is already being felt, although President Donald Trump talked about negotiating a deal with China. Whatever happens, trade disagreements are going to take a while to resolve and the longer they continue the greater the impact will be on market sentiment.

Italy’s budget perplexes

The European Commission unsurprisingly rejected Italy’s controversial budget proposal. Italy’s new coalition government is seeking to tax less and spend more, unilaterally marking an end to the era of austerity in Europe. Italy has to decide whether or not to make the necessary concessions in a revised budget to appease the European Commission. A concession would be a preferable route for the Italian bond market but may not go down too well with the country’s voters.

Brexit negotiations muddle on

The terms of Brexit are allegedly 95% done and yet we seemed to be no closer to an agreement. No tangible progress appeared to be have been made this month, particularly around the major sticking point of the Irish backstop issue. There is potential for positive movements in markets should a softer version of Brexit emerge or even agreement on an extension period.

Corporate earnings season boost

The corporate earnings season, when companies release their latest business results, has been good so far. But it was perhaps not as good as might have been hoped, particularly in the US, where the benefits of recent tax reform should now be evident. Market expectations were high and had already largely been reflected in higher share prices. The fading impact of fiscal reform, rising wages, and recent increases in the oil price will all put pressure on future corporate earnings.

Good news, bad news on US economy

Although the Fed is tightening monetary policy through interest rate rises it is still supportive of strong US economic growth, and the benefits of Trump’s tax reform are still feeding through. Elsewhere, central banks remain very supportive with few interest rate rises on the cards in the near future. There is potential for markets to improve should any of the prevailing geo-political issues subside.

Attention turns to the investment cycle

Tightening monetary policy, a boom in technology stocks, and a last-gasp equity market rally have historically all been precursors to an inevitable market slowdown and eventual slide into recession. However, each investment cycle is different and no one can say with any certainty where we are currently positioned. Consensus expectations among analysts are that any slowdown is unlikely to occur until 2020. That sets the scene for 2019 to be the year in which investors start to reposition for the next phase of the cycle.

Outlook

Given everything that is going on caution is advisable. Market volatility is on the up and is currently unusually high. October was a very tricky month for investors, although equity markets enjoyed an increase towards the end of the month. While we are slightly underweight in equities across our portfolios we are not retreating from investing in this asset class. There is still life left in the equities bull-run and we don’t want to miss out on that potential. Recent market corrections offer some short-term trading opportunities but we will be approaching these with caution.

There have been signs of investors ‘de risking’ with a move to bonds, notably government bonds such as US treasuries. Our preference is to look to alternative asset classes as our strategy for offsetting equity risk while seeking opportunities in other bonds than those issued by governments. Bond markets are also potentially vulnerable to expected shifts in central bank monetary policies. Our multi-asset strategy gives us plenty of options. In times of uncertainty we remain focused on the longer term objectives of our portfolios and our investors. We remain very alert to the changing environment.

 
Oliver Wallin, Octopus Investments

e: owallin@octopusinvestments.com

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 2018. CAM07618.