Ark Review of the Month
In October, the second coronavirus wave swept through Europe. Most countries have tightened their restrictions. High-frequency data shows that the manufacturing industry continues to recover while the services sector struggles. Positive gains in the first half of the month were erased quickly in both European and the US stock market with volatility spiked. S&P 500 Index fell 2.7% during the month, while FTSE All Shares fell 3.8% and MSCI Europe ex-UK Index fell 5.4%. Asia generally outperformed the rest of the world, with strong Chinese economic data helping MSCI Emerging Market Index rally 2.1% over the month.
In the fixed income market, US Treasury and UK Gilt prices decreased 0.9% and 0.6% respectively, while fears surrounding the coronavirus outbreak in Europe pushed up the prices of government bonds in major European economies. Corporate bonds were broadly flat comparing to the beginning of the month, global investment grade corporate bonds price decreased slightly, by 0.1%.
Government bonds yield as of 1 November:
UK Gilt 10 Year @0.26%
US Treasury 10 Year @0.86%
German Bund 10 Year @-0.63%
The Brexit negotiation is back on again. The European Council meeting on 15 and 16 October was previously seen as a deadline to reach an agreement, however a consensus was not reached during the meeting. The UK and the EU had been hoping for a "zero-tariff" agreement to govern their trading relationship once the UK's post-Brexit transition period ends on 31 December. If no deal is reached, they will need to operate on World Trade Organisation rules, with tariffs being imposed.
On 31 October, the UK government announced a national lockdown. However, unlike the previous lockdown, schools will remain open. The government’s furlough scheme will be extended to December, about 9% of the UK workforce are still on furlough at the moment.
Since the beginning of the year, UK corporate bond yields have fallen, along with falling base rate and expected inflation. Various economic sectors have been badly hit and facing considerable downgrade and default risks. At the moment, a typical investment grade bonds issued by a bank with up to 6-year maturity may have a yield to maturity of about 2%, while if the investor chooses to buy and hold infrastructure or utility company’s shares, dividend yields can easily reach 4-5%, and the yields are typically inflation linked. Our investment strategy has always been to strive for better returns while maintaining sector diversification and focusing on downside protection, in today's economic environment, we believe that some equity investments are more attractive than corporate bonds in the medium to long term.
Global equity markets have also been very divergent this year. Growth stocks have surpassed cyclical and value stocks. Growth stocks generally have high price-to-earnings ratios, and are normally high-quality global leaders whose earnings are expected to continue growing despite the economic downturns. Value stocks, on the other hand are relatively inexpensive, represented by large bank and oil sector stocks. If we look at MSCI World Index constituents‘ performance by their size and style, large cap growth stocks have achieved returns of 16.40% yield to date, while large cap value stocks have lost 17.04%. Moving into the winter, we will continue to focus on growth sectors in the economy, and we believe that an expected shift into economic recovery will continue to support the equity market performance.
We hope that you and your loved ones stay safe and healthy throughout this challenging time. We want to reassure you that our business will continue to offer high standard services as always.
Should you have any queries, please feel free to contact your usual advisor or our investor relations team. Follow our twitter @WealthArk to receive products and services update each week.
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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