Ark Review of the Month
Developed market equity prices increased slightly in Q3, with the US S&P 500 increased 0.6%, the UK FTSE All-Share up 2.2%, and the MSCI Europe ex-UK Index up a modest 0.2%. In most markets, the September decline offset most of the gains brought about by the previous two months. However, the overall year-to-date return of developed market equities can still be characterised as strong, especially when contrasted with the highly volatile emerging market equities. The MSCI Emerging Markets Index fell 8.0% for the quarter and the MSCI Asia ex-Japan Index fell 9.2%.
The main news in the Eurozone recently was the outcome of the German election. With the two main parties in a tight race, it could take months for Germany to form a government. The Schedule of the election for a new chancellor has yet to be determined. However, the election results will not have much impact on German or European markets, as the new government is unlikely to tighten fiscal policy or introduce major stimulus measures in the near term.
Global sovereign bond prices generally fell in the third quarter, with the top faller UK Gilt down by 1.9% in price and the UK 10-year Gilt yield reaching 1.02%. German Bund price fell 0.2%, and the US Treasury price was flat comparing to July. Global investment-grade corporate bond prices also decreased by 0.8%.
Government bonds yield as of 30 September:
UK Gilt 10 Year @1.02%
US Treasury 10 Year @1.50%
German Bund 10 Year @-0.21%
After a summer of rebound, the UK economy is showing signs of slowing growth. The latest data show that UK GDP grew by 3.6% in the second quarter of 2021 compared to the first quarter. However, July contributed only 0.1% to that increase, well below the 1.0% growth in June and was the weakest monthly performance this year.
UK retail sales fell by 0.9% in August 2021, meaning that retail sales have fallen month-on-month for four consecutive months, with retail footfall after the restrictions lifted well below the market's previous expectations. Over the past month, more than 6.5% of retail businesses experienced difficulties sourcing raw materials, goods and services.
The Consumer Price Index (CPI) inflation rate was 3.2% in August 2021, up from 2.0% in July. This was already higher than the Bank of England May 2021 inflation projection of 2.5%. In August, BoE also revised the forecast to a peak of 4.0% by the end of 2021. Global supply shortages and increase in energy prices are the two main drivers of the recent inflation.
Energy stocks have surged with inflation. Currently, coal and natural gas, the finite resources, supplies 2% and 47% of UK power respectively, while renewable generation supplies about 30% of the UK's electricity. However, the supply of renewables is still erratic. Battery storage and hydrogen energy have become the two areas that enjoy the most attention at the moment and have a welcoming environment for investors.
There are some other industries that we believe are resistant to inflation, one of them is pharmaceuticals. A good example will be our long-term holdings AstraZeneca who has recently released a string of news of new drug approvals. The company’s core business, the discovery, development and commercialisation of prescription medicines rather than the production of vaccines, has proved resilient with revenue and earnings both beating analysts' expectations over the last period.
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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 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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