Ark Review of the Month
Global equity markets posted notable gains in the third quarter, but regional performance diverged, with Asia and the US outperforming Europe and the UK. US equities continued to perform following their strong start of the year, achieving a return of nearly 9% in the quarter. Due to the remarkable success of Asian countries in controlling coronavirus, Asian equities increased more than 10% in the quarter, up 5% year-to-date, making them one of the best performing regions this year. Underground usage in major Chinese cities has recovered to 90% of its peak in 2019, while London’s underground usage in the third quarter was down 60% comparing to the same period last year. UK stock market fell 3% in the quarter and was down 20% year-to-date. European equities also lagged behind the rest of the world with returns of 2% in the quarter and -7% year-to-date.
Global government bond were stable in the quarter. European government bonds performed well in general, led by Italy with a 3.4% increase in government bond price, Spanish and German government bonds were up 1.7% and 0.5% respectively. Emerging market government bond also performed well with an increase of 2.3%. With the help of current monetary policies, global corporate bond yields were kept low, and prices have increased significantly during the quarter. Investment grade bonds were up by 1.8%, while high-yield bonds with relatively low credit ratings experienced an increase of 4%.
Government bonds yield as of 1 October:
UK Gilt 10 Year @0.26%
US Treasury 10 Year @0.71%
German Bund 10 Year @-0.52%
In the UK, investor sentiment was affected by fears around a no-deal Brexit, while at the same time, some areas are facing a second lockdown due to rising COVID-19 cases. Luckily, companies with domestic focus performed well overall in the quarter and many have resumed dividend payments. On the contrary, companies with more international client base are struggling while the increase in sterling has made UK exports more expensive. Overseas investors, however, see this as a good chance to negotiate merger and acquisition with UK listed companies.
On the policy front, Bank of England has written to commercial banks asking them how prepared they are for negative interest rates. Bank of England said that in order to ensure the effectiveness of negative interest rates as a monetary policy tool, they need to know whether there is any operational or technical challenges. The financial sector, as a key transmission mechanism for monetary policy, needs to be prepared in advance. Market believes that Bank of England is likely announce negative rate in 2021, for the first time in its 326-year history.
This year, Ark's investment team has focused on the ’New Economy’, looking for investment opportunities in a rapidly changing market. The growth of e-commerce has not only speeded up the maturity of online retail supply chain, but has also benefited many surrounding sectors, including the packaging industry. The global packaging industry is worth nearly £60 billion, up from £45 billion in 2015, with a compound annual growth rate of 5.6%. Factory production in Europe was down nearly 30% year-on-year due to the pandemic, but thanks to the large number of online retail orders, box shipments has remained stable comparing to last year. Outlook for packaging industry are still positive. However, not all companies can catch up with the market trends. EU has announced that from 1 January 2021 onwards, non-recyclable plastic packaging will be taxed at a rate of 0.8 euros per kilogram (£0.72). Companies focusing on environmentally friendly products will surely have more opportunities in the future.
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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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