Ark Review of the Month
Global economic activity picked up in February. The US Purchasing Managers' Index (PMI) of manufacturing and service sectors increased to 58.5 and 58.9 respectively. EU’s manufacturing PMI also increased to 57.7, however EU’s service index remained weak at 44.7. S&P 500 Index was up 2.8% for the month and the MSCI Europe ex-UK Index was up 2.6%. Value sectors such as energy and financial services outperformed the rest of the market. MSCI World Value Index increased 4.8%, while MSCI World Growth Index increased only 0.4%. The Bloomberg Commodity Index, which reflects commodity futures price movements, rose 6.5%, driven by the rise in the price of crude oil over the month.
The US 10-year Treasury yield broke through 1.55% by the end of February, reaching its highest level since the start of the pandemic. Over the past year, the US 10-year Treasury yield has been fluctuating between 0.60% and 0.80%. The borrowing cost doubled in a short period. Other developed countries’ sovereign debts were also dragged by the US market, UK 10-year Gilt yield reached 0.82% by the end of February, and bond prices dropped by 5.8% over the month. Global investment-grade corporate bond prices also decreased by 1.4%.
Government bonds yield as of 1 March:
UK Gilt 10 Year @0.82%
US Treasury 10 Year @1.41%
German Bund 10 Year @-0.26%
In the UK, vaccination is progressing very well. With 20 million people already vaccinated, the country is at the forefront of all developed countries. The government recently announced a target of achieving full population coverage by July and schools starting to reopen from March. This led to a strong February for sterling, which increased 1.8% against the US dollar. FTSE All-Share Index closed up 2%.
A number of financial companies in Ark's fixed-income portfolio released their annual reports in February. Although financials were inevitably affected by macroeconomic factors, the companies still maintained their profitability and ability to pay out coupon payments to bondholders, and also provided financial support and assistance to customers and employees during the difficult time. The companies are also reinstating their dividends in 2021.
Barclays Plc’s annual report showed that the company was profitable in every quarter of 2020, with a full-year profit before tax of £3.1 billion, earnings per share of 8.8 p. The company announced a final dividend of 1.0 p per share. Diversified income streams ensured that the company delivered a resilient operating performance even amid the pandemic. Group revenue was £21.8 billion, up 1% from the previous year, revenue from Corporate and Investment Banking increased reached a record high of £12.5 billion, up 22% from the previous year, due to a buoyant trading environment.
Lloyds Banking Group Plc said in its annual report that it had maintained a resilient financial performance in a highly challenging economic environment. In 2020, the company’s net income was £14.4 billion, net profit after tax was at £1.4 billion. The number of retail current accounts increased by 27% during the year, outperformed its competitors. The loan-to-deposit ratio of 98 percent, provided a strong liquidity position and significant potential to lend into recovery. As the largest online bank in the UK, the company has invested heavily in its digital platform over the past year, and now has a total of 17.4 million active online customers.
HSBC Holdings Plc reported total revenue of £36.1 billion and a profit before tax of £6.3 billion in 2020. Deposits grew by £146.1 billion, with growth in all global businesses. The company plans to invest £4.3 billion in wealth management and private banking in Asian markets by 2025, aiming for double-digit growth in profit before tax in the region in the medium to long term.
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