In December, market players followed exciting American blockbuster (or rather a comedy?) “Fiscal Cliff”, the central figures in which were Republican and Democratic leaders.
They almost daily announced that they are either “nearing agreement” or, on the contrary, “reached a deadlock in negotiations”. Those statements aroused respective reaction of speculators, causing rather high volatility in stock markets. However, it appears that most long-term investors (including us) were more or less sure that there will be a “happy end”, therefore almost all major stock indexes finished the month with a plus.
Manager of the stock funds kept to holding strategy, since we expected the “fiscal cliff” problem to be solved, because the US political rivals had no alternative. Politics is one thing, but failure to reach understanding could lead to serious economic aftermath, and then there will be no winner. Therefore, decline in stock markets was used by the fund manager to make purchases aimed at decreasing cash component of the funds. At the same time, most attention was paid to optimization of the funds’ structures, under which the share of certain positions associated with increased currency risk was reduced.
The bond market of emerging countries once again demonstrated high sustainability, given nervous situation in stock markets. The demand for bonds remained high, no one was willing to sell, and therefore it was rather difficult to buy something at reasonable prices. But nevertheless manager of the bond funds continued to reduce cash component of the funds, using the opportunities to purchase the most attractive securities.
Still, the cash component remains rather high, which is mainly due to continuing inflow of funds (in December, it was about USD 3.5 million). Also, given sharp liquidity decline in the market, it was quite troublesome to invest those funds.
Making a brief evaluation of the annual results, it can be said that the year was rather successful for the investors. Market of government and corporate bonds of emerging countries was especially “surprising”, demonstrating the yield at least twice exceeding the forecasts. This was mainly due to significant increase in interest to this category of assets demonstrated by large institutional investors, given reassessment of risks in global bond market. In our opinion, this trend will be preserved in the next year, which should stimulate further decline of yield and consequent increase in prices. In turn, this should ensure good income for investors, although it can be not as impressive as that in the last year.
Our outlook on stock market in 2013 remains moderately positive, given the expectations that the world economy will grow faster after getting over the most acute phase of the European debt crisis, which will have positive impact on securities markets. Stock markets might get additional support from money inflow from bond markets, taking into account record-low yields there.
The funds’ performance results as at 31 December 2012 can be found at ABLV Bank home page in section “Open-End Mutual Funds”.