Ark Review of the Month
Both global equity and bond markets experienced a tough February amid the tension between Russia and Ukraine. Expectations of interest rate hikes by major global central banks also led to a decline in investor confidence in the economic outlook. Global growth stock prices fell by 3.5%. Value stocks outperformed growth stocks slightly but were still down 1.6%. Among developed market equities, the UK FTSE All-Share Index was down 0.5%, the US S&P 500 Index decreased 3.0% and the MSCI Europe ex UK Index dropped 4.3%.
As for the global sovereign bond market, US Treasury prices fell by 0.7%, while UK Gilt and German Bund prices fell by 1.5% and 1.6% respectively. Global investment-grade corporate bond prices fell by 2.1%, while UK investment-grade corporate bond prices fell by 2.45% overall.
Global commodity prices rose by over 6% in February as Brent oil and gas prices surged.
Government bonds yield as of 28 February:
UK Gilt 10 Year @1.38%
US Treasury 10 Year @1.83%
German Bund 10 Year @0.13%
The most significant impact of the international turmoil for the UK will be on the economic front, particularly in the form of further increases in energy prices. In its economic review at the beginning of February, the Bank of England warned that "higher energy prices would further restrain growth in global and UK activity".
Russia is one of the world's largest producers and exporters of oil and gas. In February, oil prices went above $100 per barrel, reaching their highest level since 2014. Gas prices have also risen sharply internationally and in the UK. Energy bills for both businesses and households are set to rise. On 3 February, the Chancellor announced a package of measures to reduce the impact of higher energy prices, including a one-off £150 rebate in April to most households who pay council tax and a one-off £200 reduction in energy bills this autumn that has to be repaid over the following five years.
Food prices may also continue rising, with both Russia and Ukraine being important producers of many main agricultural products, including wheat. UK household spending budgets will be squeezed further in the coming months. The severity of this may be the key to the UK's economic outlook for 2022.
With high inflationary pressures, Ark has been focusing more on inflation-proof assets than ever. Earlier this year, Ark started to invest in Supermarket Income REIT (SUPR), the UK's first real estate investment trust dedicated to investing in supermarket units. The REIT mainly holds commercial properties on long-term leases of 15-25 years with large supermarket chains. We believe that the allocation to this fund would provide our clients with long-term, secure, inflation-linked income with the potential of long-term capital appreciation.
The trust's market capitalisation has risen from £100 million to £1.2 billion since its listing on the LSE Specialist Funds Segment in July 2017. On 14 February 2022, rating agency Fitch issued its first long-term issuer default rating of BBB+ to SUPR, with a stable outlook. Fitch believes that in the current UK commercial property market, high-end retail parks are correcting their rental levels and the rents are likely to decline by 35-40% when current leases expire. Supermarkets, on the other hand, only spend 6% of gross sales on average on rents. SUPR's rental terms are justifiable given RPI increases in food groceries and supermarkets' modest rent to sales ratio.
As always, our Investor Relations team would be more than happy to help you with any queries.
The views expressed in this update are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument. The views reflect the views of Ark Investment Management at the date of this document and, whilst the opinions stated are honestly held, they are not guaranteed and should not be relied upon and may be subject to change without notice. Investments entail risks. Past performance is not necessarily a guide to future performance. There is no guarantee that you will recover the amount of your original investment. The information contained in this update does not constitute investment advice and should not be used as the basis of any investment decision. Any references to specific securities or indices are included for the purposes of illustration only and should not be construed as a recommendation to either buy or sell these securities or invest in a particular sector. If you are in any doubt, please speak to us or your financial adviser as appropriate.
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