Ark Review of the Month
Over the second quarter of 2022, most asset classes experienced significant drop in prices, including most of the major global equity indices. The UK FTSE All-Share Index fell by 5.0%, the MSCI Europe ex-UK Index decreased by 10.0%, the MSCI Emerging Markets Index fell by 11.3% and the US S&P 500 Index fell by 16.1%.
Central banks continued to raise interest rates to combat inflation resulting in government bond prices dropping again. US Treasury prices fell by 3.8% in the second quarter, German Bund prices fell by 6.4% and UK Gilt prices decreased by 7.8%.
Government bonds yield as of 30 June:
UK Gilt 10 Year @2.24%
US Treasury 10 Year @3.01%
German Bund 10 Year @1.34%
The rising cost of living has further squeezed household spending budgets in the UK. A recent survey suggested that 60% of respondents reduced their spending on non-essential items in June. 3/4 of the respondents were concerned about the rising cost of living. The slowdown in consumer spending growth will also reduce the GDP growth. In May, retail sales in the UK fell by 0.5% compared to the previous month.
In early June, the Organisation for Economic Co-operation and Development (OECD) released its latest economic forecasts for the UK. The OECD now expects the UK economy to grow by 0.1% over the two years period from 2022 to 2023. This number is much lower than its previous forecast of 3.8% released in December 2021.
The good news is the UK's unemployment rate remains low at 3.8%, with a large number of job vacancies, which should support overall household income levels across the economy. Most households have accumulated above-normal savings over the last two years. The Office for National Statistics estimates that the total amount may exceed £140 billion and will be able to support the financial viability of most households during the inflation.
The Bank of England voted on 16 June to raise the base rate from 1% to 1.25%. However, the move left some investors disappointed. People have been expecting a sharper rise as the US federal funds rate just increased by 0.75% on the day before. Three of the nine members of the Monetary Policy Committee responsible for setting monetary policies voted in favour of a 50 basis point rise while the majority felt that a 25 basis point rise was more appropriate. As a result, sterling fell by 0.3% against the dollar and 0.5% against the euro in one day.
In its announcement, the Bank of England mentioned that recent economic growth was below expectations as consumer confidence fell further as business sentiment declined. Inflation may continue, with the Bank's projected October CPI raised from 10% to 11%. Asset Manager Schroders expects the BoE to increase the base rate by 25 basis points at each meeting until the number reaches 2.25% in February 2023. But this may still not deter the second round of inflationary pressures. Summer strikes have already started in the UK and the workers' most important demand was an increase in their salary to match the current high inflation rate. This may add additional risk to an already fragile supply chain and drive up prices further, triggering the second round of inflation.
If the BoE continues to increase interest rates at a pace slower than market expectations, we may see a further weakening of sterling against other major currencies. On the other hand, the dollar is likely to appreciate further due to its safe-haven status and the increased divergence in monetary policy between the Federal Reserve and European central banks. UK investors may wish to consider increasing the weighting of dollar assets in their portfolios to reduce the risk of assets depreciating in line with the currency.
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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