Capital Markets Update: September 2017

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

Capital Markets Update

  • Monetary and fiscal policies look set for change
  • Political events add to investor uncertainty
  • UK looks beyond austerity
  • Cautious investment outlook continues


In a nutshell

The potential for shifts in the direction of both monetary and fiscal policy across the developed world were the focus of interest for investors and markets in September. The case for central banks to raise interest rates appeared to strengthen and an end to government austerity measures could be on the horizon. Political events added to investor uncertainty, with the US and North Korea continuing their war of words, and Angela Merkel’s winning re-election as German Chancellor for a fourth term, albeit with a need to form a new coalition government.

Markets ready for US Fed rate rise

The US Federal Reserve (Fed) is still looking to raise interest rates, but is continuing to manage the process carefully. The programme for rate rises in 2017 has not been as aggressive as planned earlier in the year. A further three rises are planned for next year, in increments of 0.25%, but a lot could change between now and then. Janet Yellen, Chairman of the Fed, announced a slowdown in its bond buying programme. This demonstrates that it intends to reduce the amount of bonds it holds in a controlled and managed fashion. Bond markets did not react too badly as they acclimatised to being weaned off the Fed’s quantitative easing.

Yellen’s future unclear

While policy remains stable, the Fed itself is in a state of flux. Vice Chairman Stanley Fischer announced plans to step down before his term in office expires and Yellen’s current term ends in the first quarter of 2018. US President Donald Trump hasn’t yet given Yellen his support for another term and she hasn’t indicated that she would want to continue. Market participants will be watching the change in the Fed’s line-up very carefully.

Markets take positive view on Trump tax reform

Trump’s tax reform bill is seen as a potentially large fiscal stimulus programme to support the economy. His plan may become more diluted as it passes through government, but cuts in corporation tax and any form of cash repatriation amnesty for US companies that currently keep their profits overseas, will be welcomed by market participants. Tax reform should be better received by the Republican majority than the healthcare bill. Markets are taking a more positive view on the chances of tax reform. The ‘Trump trade’ is slowly coming back, as evidenced by the share price movement of specific US companies and sectors set to directly benefit from his proposed tax reform.

An end to austerity in the UK?

In the UK, there is the potential for a shift in fiscal policy, perhaps marking the beginning of the end of the era of austerity. Prime Minister Theresa May changed her tune regarding pay caps for public sector workers, which could lead to wage inflation. Investors will be looking for signs in Chancellor Philip Hammond’s November budget of an easing of austerity in the measures he announces.

Carney signals possible interest rate rise

The Bank of England’s Governor, Mark Carney, hinted at a potential rise in interest rates. Such a move would likely be seen as a straightforward reversal of the 0.25% cut imposed immediately after the Brexit referendum. It wouldn’t necessarily mark the start of a concerted programme of raising rates. Concerns over Brexit, combined with the absence of inflation and concerns over the impact raising interest rates might have on consumers, will likely lead to a more cautious stance at the Bank.

Merkel wins but faces opposition

Politics remained firmly in the spotlight. Fire and brimstone exchanges between Trump and North Korea are a real worry, but market participants seem to think they will come to nothing. Angela Merkel re-election as German Chancellor brought an air of stability to the political stage, but it was not as convincing as had been expected and she must now hammer out a new coalition government. The role of Finance Minister is up for grabs and this has the potential to pave the way for a more relaxed fiscal policy.

Europe and Japan consider policy options

Elsewhere, markets pushed up the euro higher, even though Mario Draghi, President of the European Central Bank, said nothing in the month about a change in policy direction. Markets are on high alert. Draghi has also continued to call for government help – monetary policy alone can’t solve the challenge of stimulating economic growth. But he is yet to change tack from his current policy. In Japan, Prime Minister Shinzo Abe backed up his recent snap election call with the promise of tax breaks for voters. All this should bode well for the short-term prospects for global markets, which are already reflecting a lot of the potential changes that could be coming. But there is still the potential for government actions to surprise investors.


There are plenty of things to be positive about, yet we still maintain an element of caution. Continuing improvement in global economic growth presents a strong case to add to equities. However, after a prolonged bull run of rising prices, we feel markets are looking a little expensive. Short-term market corrections created by geo-political events, such as growing concern over North Korea’s missile testing, may provide more attractive buying opportunities. For now, we retain a neutral view on equities generally, although we continue to favour overseas markets ahead of the UK. Returns across our portfolios benefited from a weakened sterling in September, which proved to be one of the key performance drivers for the month. Otherwise, despite growing political uncertainty, markets haven’t moved a great deal and volatility remains low.

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: October 2017. CAM05789.