Ark Review of the Month
In July, the global stock markets continued to grind higher. MSCI Emerging Market Index was up by 9.0%, and MSCI Developed Market Index was up by 4.8%. Over half of the S&P 500 companies have released their annual reports, with 85% of them exceeding profit expectations. Subsequently, the index increased by 5.6%. Corporate bonds and government bonds continued to perform well, with yields continued to decline. EU’s €750 billion recovery fund proposed in May has finally reached a formal agreement to help member states reduce the impact of the economic downturn. The biggest beneficiaries of the move, Italy and Spain, have both seen their government bond prices increased by 1% in July.
Usually, stock market and bond market move in opposite directions. The rare combination of them moving together was the result of many market drivers including: positive early-stage trial result around COVID-19 vaccine, sharp increase in cases from certain regions, governments and central bank's massive economic stimulus packages, weak economic data and rising geopolitical tensions. All these factors added uncertainty to the road of recovery and impacted market sentiments.
Government bonds yield as of 1 August:
UK Gilt 10 Year @0.07%
US Treasury 10 Year @0.52%
German Bund 10 Year @-0.56%
A survey reveals that as of 2 August, two-thirds of UK businesses have resumed operations. The Office for National Statistics recently published monthly GDP figures for May 2020, which showed a 1.8% month-on-month increase. The recovery was led by the manufacturing and construction industries, with sector GDP growth rate of 8.4% and 8.2% respectively. According to the Bank of England, UK's GDP may shrink by 9.5% this year, which is an improvement on the 14% predicted previously. But they also warned that by the end of 2020, unemployment rate may double to 7.5%, which means that about 2.5 million people may lose job.
The Monetary Policy Committee announced on Thursday that the interest rate will remain unchanged at 0.1%. According to the governor Andrew Bailey, the Bank has put negative interest rates in its “toolbox” of possible monetary policy measures for the first time, but the Bank does not currently “have a plan to use them”. Sterling has shown its best performance in July, increased 6.2% against the USD and 5.3% against EUR.
Credit markets are facing downgrade or default risk under coronavirus fears. Some investment grade bonds may be downgraded to non-investment grade. In a market where bond yields are generally lower than before, investors tend to lower their credit rating standards when choosing bonds investments in order to pursue the same return level as in previous years. We continue to favour high quality investment grade corporate bonds and avoid those with higher credit risk or lower liquidity.
Under great uncertainty, gold, as a safe-haven investment, has won favours from many investors. Earlier this week, gold price exceeded $2,000 per ounce for the first time in history. Gold price has surged by more than 32% this year. $7.4 billion (£5.7 billion) of funds flowed into gold ETFs in the past month. This makes July the seventh consecutive month of positive flows in gold ETFs. The previous six months has seen a total of over $40 billion (£30.6 billion) net inflows. Loose monetary policy also provides a strong support for gold price.
The pandemic has also created new investment opportunities, such as logistics and warehouse industries, which are in line with our investment theme of "new economy". According to industry research, in the first half of 2020, total take up of warehouse spaces have increased by 20% comparing to the same period last year. While on the other hand, gleaming offices and sparkling shopping centres may become synonymous of "traditional economy" as the future of work and retail face structural change.
Should you have any queries, please feel free to contact your usual advisor or our investor relations team.
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 guarantees 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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