Ark Review of the Month
Global equity markets were off to a slightly bumpy start in 2022. Concerns about Inflation and central banks’ tightening policies led to a sharp increase in market volatility. The US S&P 500 Index dived by 5.2%, the UK FTSE All-Share Index decreased by 0.3%, and the MSCI Europe ex-UK Index also dropped by 4.5%. It wasn’t only the developed markets, the MSCI Emerging Markets Index also decreased by 1.9%.
The shift in gears by major central banks has also put further upward pressure on bond yields. Prices of both sovereign bonds and corporate bonds have decreased significantly over the past month. German 10-year bond yields turned positive for the first time since 2019, with prices falling 1.0%. Meanwhile, the US Treasury prices fell by 1.9% and the UK Gilt prices dropped by 4.1%. Global investment-grade corporate bond prices decreased by 3.1%.
Government bonds yield as of 31 January:
UK Gilt 10 Year @1.31%
US Treasury 10 Year @1.78%
German Bund 10 Year @0.02%
The latest economic data released by the Office for National Statistics show that the size of the UK's economy grew by 0.9% in November 2021, and reached 0.7% above the February 2021 level, marking the first time that the GDP has rebounded to its pre-pandemic size. As the first cases of Omicron in the UK were identified on November 27, the economy was mostly unaffected by the variant in that month. However, it may have slowed the recovery during December and January. The hospitality sector was hit hard by the latest wave of infections, with 44% of hotels and restaurants reporting a high number of cancellations in the four weeks from mid-December.
Inflation reached 5.4% in December 2021. This is the highest rate since March 1992. Average pay is no longer growing faster than prices and concerns about the cost of living appear to be weighing on consumer confidence. In response to the current situation, the Bank of England's Monetary Policy Committee voted by a majority of 5 to 4 on Thursday to raise the base rate to 0.5% from 0.25%. This is the first time the central bank has raised interest rates back to back since 2004. According to the central bank, inflation is expected to rise to a high of 7.25% in April.
The global capital markets experienced a rather significant correction in the first month of 2022. However, when we look at different types of stocks, we can see that "value" stocks prices went down only 1.9%, while "growth" stocks dropped by 9.3%. The causes of such a change in market sentiment are complex, some are more influential than others: investors' fear of inflation and rising interest rates has hit long-duration assets hard; the escalation of conflict between Russia and the West over Ukraine caused another rally in oil and gas prices, pushing energy stocks in the value segment to outperform the rest of the market by a wide margin. This was followed by an influx of capital out of technology and healthcare companies and into the banking, materials and energy sectors. January has witnessed the worst performance of growth stocks relative to value stocks in more than 20 years.
ESG assets, which have received a lot of market attention over the past year, are also facing challenges. Apparently, ESG funds have a natural preference over IT, healthcare and other sectors that overlap significantly with growth stocks. The MSCI Global ESG Leaders Index fell by over 6% in January.
Fortunately, the earnings season, which began in mid-January, brought some good news to the market. Early reports show that overall earnings for US companies in Q4 were nearly 25% higher than a year ago, marking the fourth consecutive quarter of year-over-year corporate profit growth of more than 20%. Most companies are in good shape, with solid cash reserves and stable revenue streams. If profits continue to grow steadily, the recent pullback in the market could recover sharply albeit the timing is hard to predict.
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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