Net increase in value of investment certificates of funds managed by ABLV Asset Management:

Activities of the managing company ABLV Asset Management

In October, manager of the stock funds acted in accordance with the strategy set earlier. It should be noted that in September, upon occurrence of clear signs evidencing expected extensive economy support measures to be taken by the world’s central banks, most of the previously closed positions were decided to be restored. Currently, main strategy for the stock funds is the “holding strategy”, though high volatility is possible on the markets in the short term, especially due to presidential elections in the USA. However, given substantial improvement of macroeconomic data, overall market overview remains moderately positive.

The “holding strategy” also continued to be the main strategy for bond funds. Nevertheless, in the middle of the month, due to continuing unprecedented price increase, it was decided to take profit under particular positions demonstrating rapid growth without fundamental grounds for it. Among them, bonds of Romania, Croatia, and Hungary can be mentioned, since their prices increased by 5–7% during 2 weeks. This growth is hard to explain, but in our opinion there are just technical reasons for it. One of those reasons may be European limitations set on “uncovered short sales” of sovereign bonds and CDS, effective from 1 November, forcing speculators to close such transactions.

Due to profit taking and large inflow of funds from investors in September and October, cash component of ABLV bond funds increased significantly. Nevertheless, the funds’ manager currently keeps wait-and-see attitude, since, given the price increase year to date, we consider future short-term growth potential to be minor. Meanwhile the risk of short-term correction has grown considerably, since the second half of November and the beginning of December are traditionally viewed as the time to take profit and close positions by most traders, which can have further downward impact on the market. If our expectations come true, the correction will be used for restoring previously closed positions and reducing cash component.

The funds’ performance results as at 31 October 2012 can be found here:

• Open-End Bond Investment Funds pdf, 237 Kb
• Open-End Stock Investment Funds pdf, 231 Kb

Current situation on stock markets

In October, following rather long period of the world’s financial markets being influenced by steps aimed at global economic recovery taken by monetary and political authorities of the leading countries, attention of market players switched to macroeconomic indicators and quarterly reports of corporations released at the beginning of the month.

Macroeconomic reports published in October were varying, including predominantly negative information on euro zone and signs of stabilization in economies of the USA and China. Nevertheless, the overall situation can be said to be relatively positive.

Whereas this is not true at corporate level. After 380 of 498 companies included in the S&P 500 index have published their reports, the increase in profits by just 0.11% was observed. In Europe, the situation was seemingly better. Based on the reports of 182 largest companies included in the BE 500 index, the increase in profit amounted to considerable 16%, however it should be noted that such growth is attributable to extremely negative results of Q3 2011 (-14.3%).

Although quarterly reports largely matched expectations of most analysts, many large corporations decreased their profit forecasts for the following year due to anticipated negative developments in macroeconomic situation in the short term.

Therefore, given such diverse news, many investors preferred to take profit of the first three quarters, which lead to a drop in most major world stock indexes over the month.

During the first half of the month, the emerging countries bond market was influenced by large cash inflow, estimated to be about USD 1.5 billion per week. However, starting from the second half of the month, due to negative trends in stock markets, the emerging countries bond market sustained some pressure by sellers, which caused small price decrease. The situation was different for bonds of Argentina, the price of which fell by 20% during just a few trading sessions, after the US court ruled that Argentina in debt service should not ignore those who did not agree to the restructuring after the default in 2001.