Volatility increased in both equity and bond markets during October, despite global equities briefly touching new highs mid-month. Although signs of resilient economic growth, especially in the United States, were evident, growth risks remained a primary concern for investors. The upcoming US elections and the potential impact of policy shifts on inflation and interest rates further contributed to uncertainty.

Despite several market volatility, the third quarter of 2024 ended with decent returns across most major asset classes. For the first time in four years, the Federal Reserve reduced the interest rate by 0.5 percentage points in September. This, coupled with a less hawkish stance from the Bank of Japan and fresh stimulus initiatives in China, contributed to assuaging investor concerns and underpinning a strong rally in equity markets towards the end of the quarter.

The UK manufacturing sector showed further signs of recovery in August. Output, new orders, and employment all increased. Price pressures also eased, with both input costs and selling prices rising at a slower rate. The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers' Index (PMI) rose to 52.5 in August, a 26-month high.

At its meeting concluding on 1 August 2024, the Bank of England’s Monetary Policy Committee voted 5-4 to cut the base rate by 0.25 percentage points to 5%, marking the first reduction since the start of the pandemic in March 2020. This signals a significant shift for the BoE and could bolster growth. However, persistently high inflation in services and wages remains a challenge.

The second quarter of 2024 maintained the robust economic momentum established in Q1, with global equities continuing their positive trajectory. Early Q2 saw a significant reduction in investor expectations for central bank rate cuts due to concerns about the overheating environment in the US. This led to the underperformance of global bond markets.

Sustained investor optimism over the economic outlook boosted risk asset prices in May. The S&P 500 Index gained 5.0% over the month, the MSCI Europe ex-UK Index rose by 3.6%, and the UK FTSE All-Share Index advanced by 2.4%. 

April highlighted persistent inflation as the prevailing market risk, potentially disrupting the recovery of risk asset prices. Concerns over inflation stickiness have also somewhat offset the attractive valuations of UK equities.

The confluence of the US spring break, the UK Easter holidays, and the North American mega-eclipse in late March fuelled a surge in tourism demand in North America. US Federal Aviation Administration data showed peak-day flight volumes exceeding 50,000, reflecting robust consumer confidence and spending power.

Over the past year, inflation in most economies has declined significantly, approaching target levels. This has coincided with better-than-expected global economic performance, suggesting the possibility of an "immaculate disinflation": inflation moderates while economic activity continues to grow and unemployment remains low.

In our previous monthly insight, we mentioned our focus on Japanese assets in 2024. For decades, the Bank of Japan's ultra-loose monetary policy has artificially suppressed borrowing costs, dampened market volatility, and to some extent discouraged foreign investment.

Global economic recovery in 2023 was challenged by high inflation and geopolitical tensions. Looking ahead to 2024, Ark will focus on three major investment themes.

Global stock markets performed relatively well in November. Public data largely supports the view that central banks have reached the peak of the tightening cycle, which has also been a major boost to the positive performance of stocks and bonds over the past month.

The UK Chancellor's autumn statement is due to be released next month, but it is widely believed that the Chancellor has limited room to increase spending or cut taxes in this economic environment.

The current debate surrounding the Fed's policy is no longer about how many more basis points of interest rates to raise next, instead it is shifting to how long rates need to stay at peak levels.

In this economic environment, risk asset prices have rebounded, with equities and commodities remaining natural hedges against inflation. We continue to believe that investors should maintain diversification and focus on investment quality.

The unexpected decrease in the Consumer Price Index (CPI) in June supported the performance of UK Gilts, with the 10-year Gilt yield falling back to 4.3% and prices recovering. The FTSE Index underperformed other developed market equities slightly in July, possibly due to a weaker economic growth outlook. 

Core members of Ark’s research team were invited to Bloomberg Sustainable Business Summit on 28 June, where global banks, consumer goods companies, green energy technology firms and supranational energy organisations gathered in Bloomberg's headquarter in London to discuss how to drive business value and meet ambitious ESG goals.

Analysts believe that this year, with a stronger GDP, manufacturing output and employment data in the UK, and external factors including falling gas prices and a weakening dollar, conditions are in place for a recovery in sterling.

Given the risk of continued financial pressure and expectations of a cyclical slowdown, we are cautious about equity market investments in general. However, we hold a relatively positive outlook for stocks in the pharmaceutical and biotechnology sectors.

As for asset allocation, despite the recent collapse of Silicon Valley Bank and Credit Suisse affecting confidence in banks or the financial system globally, the Financial Policy Committee of the Bank of England has recently assessed that the UK banking system maintains robust capital, strong liquidity positions and significant resilience.

On 28 February, the yield of 6-month US Treasury Bill reached 5.14%, its highest level since 2007, and for the first time in two decades, above the 5.07% yield of a classic 60/40 US stocks and bonds portfolio.

The Bank’s Monetary Policy Committee raised the Bank’s base rate on 2 February for the tenth meeting in a row, taking it to 4.0%. But after the BoE’s meeting, market expectations of future rate increases dropped further. 

Inflation in the UK eased slightly to 10.7% in November, down from 11.1% in October as measured by the Consumer Prices Index (CPI). This was largely because transport costs (mainly fuel) didn’t rise as fast as in previous months. The Bank’s Monetary Policy Committee raised the Bank’s base rate on 15 December for the ninth meeting in a row, taking it to 3.5%. 

In addition to the windfall tax, the autumn statement also includes measures such as lowering the threshold for the 45% income tax rate and increasing the energy price freeze threshold to reduce government spending, etc. 

On 3 November, the Bank of England's Monetary Policy Committee decided to raise the base rate by 0.75% to 3%, marking the eighth consecutive interest rate increase and the highest single rise in 33 years. 

The new budget includes significant tax cuts and other policies. It is widely regarded as "the biggest tax cut in any budget since 1972". By implementing it, the government aims to have the economy growing at 2.5% in the medium term.

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.

Soaring inflation also threatens public finances, with around a quarter of the UK government's debt linked to the Retail Price Index RPI, leading to a recent surge in the government's interest payments, which reached a record high of £19.4 billion in June 2022.

If the BoE continues to increase interest rates at a pace slower than market expectations, we may see a further weakening of sterling against other major currencies. On the other hand, the dollar is likely to appreciate further due to its safe-haven status and the increased divergence in monetary policy between the Federal Reserve and European central banks.

From the macro perspective, the market is still exposed to risks including global monetary policy tightening and the Ukraine war and lacks a clear catalyst to change sentiment. The good news is that data coming out of a number of key sectors shows that we appear to have moved past the most challenging stage of the global supply chain crisis. 

Global food producers and retailers need to explore more sustainable food production and distribution solutions with the help of technology and innovation. We believe that more investment opportunities will emerge on the way, including precision agriculture, fertiliser innovation, natural and chemical preservative development and plant-based food technology.

Funds of sustainability and ESG themes suffered severe setbacks in January and February, followed by a mild rebound in March. Defensive assets (for example, tobacco, utilities and oil) and real assets (for example, real estate and infrastructure), were the top risers during the quarter.

The most significant impact of the international turmoil for the UK will be on the economic front, particularly in the form of further increases in energy prices. In its economic review at the beginning of February, the Bank of England warned that "higher energy prices would further restrain growth in global and UK activity".

The global capital markets experienced a rather significant correction in the first month of 2022. However, when we look at different types of stocks, we can see that "value" stocks prices went down only 1.9%, while "growth" stocks dropped by 9.3%. The causes of such a change in market sentiment are complex, some are more influential than others.

Considering the inflation and other economic data, the Bank of England's Monetary Policy Committee voted in December to raise the base rate to 0.25% from the historical low of 0.1%. It was the first rate increase in the UK in the past three years.

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.

While attending the 10th Annual Risk EMEA Summit in London, our risk officer keenly observed that ESG and climate risk sessions attracted far more delegates than any other session. The fact that ESG related discussions occupied one full day in a two-day summit speaks volumes about how much (or little) many of us know about ESG's application.

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. 

The automotive industry has long been the backbone of the UK economy. Total manufacturing output in the second quarter was 1.8% higher than the first quarter and 26.3% higher than the same period last year, with the main driver being transport equipment manufacturing.

Against the backdrop of high global inflation, we are paying more attention to industries and stocks with consistently growing dividend yields. The FTSE 100 is currently expected to yield 3.7% in 2021. Statistics show that nine companies are set to deliver dividend yields of more than 7% this year, and most of them are from the financial and energy sectors. 

The UK's economic recovery continued to exceed expectations as restrictions eased in May and June. Growth was particularly strong in the service sector, such as retail, hospitality and hairdressing. GDP grew by 2.3% in April 2021, which is the third consecutive month of growth in GDP.

As business activity resumes and the economy recovers, we see signs of global inflation. UK CPI doubled in April, rising to 1.5% from 0.7% in March. The main contributors to the rise in CPI were household services such as gas and electricity, and clothing sales and transport. Petrol price is also at its peak since 2020 due to high oil price.

Since March 2020, the total household savings level in the UK has increased by £125 billion as consumption fell and incomes remained stable. The high level of household savings combined with growing consumer confidence may create a potential spending and investment boom in the near future.

With the recent rise in bond yields, investor demand for safe-haven assets has also shifted significantly towards riskier asset classes such as equities.

The US 10-year Treasury yield broke through 1.55% by the end of February, reaching its highest level since the start of the pandemic. Over the past year, the US 10-year Treasury yield has been fluctuating between 0.60% and 0.80%. The borrowing cost doubled in a short period. Other developed countries’ sovereign debts were also dragged by the US market.

In 2020, the FTSE Indices have not performed as well as people expected. Large and mid-cap stocks indices, FTSE 100 and FTSE 250, dropped 8.5% and 11.6% respectively for the year. However, the FTSE AIM All-Share index which represents performance of the Alternative Investment Market increased 21.8% overall and was among the top performing global indices.

Global equity markets continued to rally in the final quarter of 2020. In terms of regional distribution, top performers were MSCI EM Index and MSCI Asia ex-Japan Index, both increased almost 20%, benefiting mainly from the recovery in manufacturing and trading in Asia.

The government also announced an extension of its furlough scheme till the end of March. The Office for Budget Responsibility predicts that government borrowing will reach £384 billion this year, which equals to 19.4% of GDP, a figure not seen since the Second World War. 

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. 

 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%. 

During the first half of the year, the market was expecting a V-shaped or U-shaped recovery, but we tend to believe that a K-shaped recovery is more likely to occur as pointed out by many economists. 

Credit markets are facing downgrade or default risk under coronavirus fears. Some investment grade bonds may be downgraded to non-investment grade. In a market where bond yields are generally lower than before, investors tend to lower their credit rating standards when choosing bonds investments in order to pursue the same return level as in previous years.

As of 27 May, a total of 1,287 of S&P’s credit ratings were on downgrade warning, either with ‘negative outlooks’ where a rating change might take two years, or on ‘Credit Watch with negative implications’ where the risk of downgrade is almost imminent.

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