Global Market

 

After a strong rally in July, the global equity markets came under downward pressure from economic uncertainties in August. The MSCI World Index fell by 4.1%. The MSCI Europe ex-UK Index was down 4.7%, the FTSE All-Share Index was down 1.7% and the S&P 500 Index was down 4.1%. Japanese markets outperformed most of their peers from developed markets, with the Topix Index up 1.2%. Most emerging market countries experienced positive economic momentum, with the MSCI Emerging Markets Index up 0.5%.

 

In the global bond markets, rising global sovereign bond yields led to prices dropping in almost all fixed-income investment categories in August. The UK Gilt prices fell by 8.1%, the German Bund prices dropped by 5.0% and the US Treasury prices fell by 2.5%. Global investment grade corporate bond prices decreased by 3.7%.

 

Government bonds yield as of 31 August:

UK Gilt 10 Year @2.80%
US Treasury 10 Year @3.19%
German Bund 10 Year @1.54%

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UK Market

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In the UK, the cost of living crisis shows no sign of easing. Inflation reached 10.1% in July, the highest level in 40 years. In the 12 months to July, electricity, gas and other fuel prices have increased by 70.3% and food prices have increased by 12.8%. Some of these food prices have risen particularly sharply. For example, the prices of milk, cheese and eggs have increased by almost 20%. The Bank of England predicts that inflation will exceed 13% in the last quarter of 2022. Investment bank Goldman Sachs predicts that inflation could rise to over 22% next year if gas prices remain high.

 

The UK economy continues to decelerate. GDP fell by 0.1% in the second quarter of 2022, the first decline in GDP since the beginning of 2021. Service sector output fell by 0.4%, manufacturing output was unchanged, and construction output grew by 2.3%. The Bank of England forecasts that the UK may enter a recession (generally defined as two or more consecutive quarters of decreasing GDP) later this year and the recession may last until the fourth quarter of 2023.

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Ark Insights

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The year 2022 marks the 25th anniversary of the Bank of England's independence in setting monetary policy. The Government sets the inflation target, currently at 2.0%, and the Bank's Monetary Policy Committee sets the base rate to meet this target. With inflation soaring into double digits, the Bank's performance has recently been attacked and questioned. However, Liz Truss, who has just been appointed leader of the governing Conservative Party and Britain's next prime minister, said on Sunday that she is a "great believer" in the independence of the Bank of England and its responsibility to determine policy on inflation.

 

The Bank of England has been raising its base rate since December 2021, from 0.1% to 1.75% in August 2022. The market expects the base rate to exceed 3% by the end of this year and may peak at around 4.1% in June 2023. By the end of next year, the Bank may gradually cut rates back to about 3.8% amid receding inflationary pressures and expectations of a prolonged recession.

 

In other parts of the world, such as the US, inflation has experienced a sharper-than-expected deceleration thanks to the Fed's aggressive monetary tightening policy. We, therefore, remain positive on dollar assets and continue to hold US Treasuries for our clients. Emerging market central banks have also done a better job of controlling inflation in general through swift interest rate increases. Most EM regions also have a better economic outlook than their developed counterparts.

 

For investors, rising interest rates may affect asset allocation decisions. For example, in a phase of rising interest rates, one should consider short-term bonds over long-term bonds when allocating to fixed-income investments. One may also need to consider optimising the use of leverage when making property investments.

 

As always, our Investor Relations team would be more than happy to help you with any queries.

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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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