Ark Review of the Month
As economic activities resume, global economic data has shown signs of a sharp rebound. Though department store chains are still struggling, online retailing is growing at an astonishing rate and has brought positive vibes to the market. In May, US retail sales increased by 17% month-on-month, UK retail sales increased by 12%. Most of the world’s stock markets also performed strongly. The US S&P 500 index was up 20% in the second quarter, MSCI Emerging Market and the Europe ex-UK increased 18% and 15% respectively. Followed by UK FTSE All-Shares which rose 10%. It is worth mentioning that due to the recovery in oil prices, energy sector has become one of the best performing industries in the strong rebound in second quarter. However, the stock prices of most industries have not reached the level before the pandemic. Taking the S&P 500 index as an example, only IT (YTD 14.83%), consumer discretionary (YTD 8.76%) and communication services industries (YTD 1.12%) reached positive growth in the first half of 2020.
Government bonds continue to hold up well. Half year return of UK Gilts reached 9.7%, and return of US Treasury was 8.7%. Stimulus measures provided by central banks have kept government and corporate borrowing costs low. However, the Fed and other central banks have made it clear that their goal is to alleviate liquidity risks, rather than to rescue insolvent companies, some business will still face administration. In May, 722 US companies filed for bankruptcy protection, 1.5 times the same period last year.
Government bond yield as of 1st July:
UK Gilt 10 Year Yield @0.18%
US Treasury 10 Year Yield @0.67%
German Bund 10 year Yield @-0.43%
Boris Johnson announced on 30th June the government’s £5 billion plan on infrastructure construction to provide impetus for recovery. The plan is expected to include hospital maintenance, school rebuilding programme and upgrading of road and rail networks.
According to investment bank analysis, value stocks and cyclical stocks with significant upside potential in the upcoming recovery phase align well with the UK equity market. The FTSE 100 has a 40% cumulative exposure to value sectors such as banks, materials and energy. It shows great potential of the UK market in the next twelve months.
As of 27 May, a total of 1,287 of S&P’s credit ratings were on downgrade warning, either with ‘negative outlooks’ where a rating change might take two years, or on ‘Credit Watch with negative implications’ where the risk of downgrade is almost imminent. Outlooks of UK banks Barclays, Lloyds and RBS were changed from stable to negative as well. But according to recent rating report, credit ratings of banks are still resilient considering the possibility of U-shaped or V-shaped economic recovery in the coming year, support from public authorities, and bank’s strengthened balance sheets over the past decade.
Unlike the 2008 global financial crisis, this time the banking sector has not been a direct source of stress or an amplification of travails for the economy. Most banks have learned from the financial crisis, and are now better capitalised, better funded and have better liquidity. According to the Bank for International Settlements (BIS), from 30th June 2011 to 20th June 2019, the common equity Tier 1 capital of the world's 100 largest banks increased by 98%, or say about £1.7 trillion. Development of online banking in the past few years has also been successful and has helped the banking industry quickly adapt remote working under social distancing circumstances.
We would like to thank you first for your support over the past years, our company couldn’t have developed so quickly without you. As a result of recent strategic development on our services, we have rebranded from Ark Wealth to Ark Investment Management, taking effect from 15th June 2020. Legal representative and legal status of the business entity will remain unchanged, all previously signed agreements will still be valid, all business relationships and service commitments will not be affected. Ark will, as always, provide you with the best quality investment management and consulting services!
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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