Ark Review of the Month
November saw a marked polarisation in global equity and bond markets driven by concerns over the new coronavirus Omicron variant. Equities in developed markets fell by 2.2% over the month. The S&P 500 Index decreased 0.7%, the UK FTSE All-Share Index fell 2.2% and the MSCI Europe ex-UK Index was down 2.5%. Emerging market equities performed similarly poorly, with the MSCI Asia ex-Japan Index down 3.9% and the MSCI Emerging Market Index down 4.1%.
Government bonds, on the other hand, saw a long-overdue rally. UK Gilt prices rose by 3.1%, sovereign bonds issued by developed EU countries and the US also performed relatively well. However, prices of global investment-grade corporate bonds fell by 0.8% over the month.
Government bonds yield as of 30 November:
UK Gilt 10 Year @0.81%
US Treasury 10 Year @1.45%
German Bund 10 Year @-0.35%
The UK's economic recovery has slowed in recent months. After rising by 5.5% in the second quarter, GDP growth in the third quarter was 1.3%. In terms of monthly figures, GDP grew by 0.6% in September, after a weak July and August. The main driver of the rebound was a pick-up in output in the healthcare sector, with a marked increase in the number of GP appointments. A recent report produced by the Office for National Statistics shows that the UK's total GDP is still 0.6% below its pre-pandemic level. However, different sectors are recovering at different paces. The service sector, which was hit hardest during the lockdown, still has an output of 5.5% below pre-pandemic levels.
The upcoming festive season may continue to energise the market. With UK households starting their Christmas shopping early, retail sales growth in October has already exceeded expectations and consumer confidence is steadily rising.
The inflation crisis has continued to be under the spotlight over the past month. The US Consumer Price Index (CPI) jumped to 6.2% year-over-year in October, while in the UK the figure was 4.2%. The main sources of the recent inflation continue to be global supply shortages and surging energy prices. The supply chain disruptions have been caused mainly by declining global production capacity and transport bottlenecks over the past year. However, none of them seems to be a long term problem. Supply chain backlogs will ease as the market responds to high demand and rebuilds inventories, and the global shipping costs have already dropped from their historical high. The market expects the supply chain to be back to normal operations by the second half of 2022. Energy prices, however, will be problematic for a longer period. While the current global economic recovery is driving demand for oil and gas, especially in the manufacturing sector, supply is struggling to increase. Government policies are encouraging companies to spend more on research into renewable energy, and spending on traditional energy exploration and production has inevitably been curtailed. Investing in clean energy is certainly the right step for a more sustainable future, but in the current context, it is further exacerbating the energy crisis.
Rising inflation has put pressure on central banks around the world to raise interest rates, but this is not an easy decision to make. The world economy is more vulnerable to rising interest rates today than it has been in the past. Total government debt has already exceeded the world's total GDP, and if borrowing cost rises, the governments will bear the brunt of the impact, with bond and equity markets also taking a hit. The UK is a good example, the Bank of England base rate was kept at its historic low of 0.1% at the Bank's Monetary Policy Committee meeting in early November by a vote of 7-2, despite strong market forecasts of a rate rise. Bank of England Governor Andrew Bailey said he was very uneasy about the current rate of inflation and that the Monetary Policy Committee would have to act if inflation remained above the 2% target in the medium term. If the base rate rises, the cost of borrowing for businesses and individuals will also rise significantly.
Against this backdrop, equities and inflation-linked bonds can be more bullish than fixed-income investments. Investors with a lower risk preference could also consider more robust real asset investments, such as property investments, which are often seen as one of the key inflation-proof assets. Ark provides real asset investment solutions to family office clients and helps them build a portfolio of real estate investments that provide a solid long-term income stream. If you would like to find out more, please contact your investment adviser in the usual way.
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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