In May, trends of the previous months continued on the global stock market – markets of developed countries were growing, and those of most emerging countries declined.
Therefore the yield spread between indexes MSCI World (more than 80% of which is composed by developed markets) and MSCI Emerging Markets has reached almost 15% since the beginning of the year (increase by 10.1 and decrease by 4.5 respectively), which is a record. In our opinion, it is rather hard to explain such dynamics. 7-month long growth of the US market is at least supported by macroeconomic indicators. GDP is growing, unemployment declines, real estate market has revived, and it is also important that housing prices grow alongside their sale volumes in the USA. As far as the euro zone is concerned, macroeconomic situation there is quite the opposite: GDP is negative (for sixth consecutive quarter!), unemployment is record high, etc. The situation is the same at corporate level. Whereas results of Q2 evidenced average profit increase of S&P 500 companies by 2% in Q1 2013/ Q1 2012, the largest European companies of ВЕ 500 index recorded average profit decline by 10%! Also, it cannot be said that major European stock markets are undervalued comparing with the US stock market. P/E (price/earnings ratio) of the French index CAC 40 and the UK index FTSE100 are higher than, while that of German DAX is equal to, S&P500. But this did not preclude German index DAX from rising by 5.5% in May, compared with 2.1% of S&P500, and from reaching historical maximum!
In our opinion, all above facts show that currently global stock market dynamics are far from being related to fundamental factors. The major impetus is the cash flow flooding the market. Since the beginning of the year, cash inflow in global stock funds and ETFs reached USD 206 billion, which is almost equal to annual inflow in 2009 and 2010, and is 2.5 times higher than that over the last year. Moreover, most cash moved to the US market, which is the reason for observed non-stop growth of the US indexes that nothing can stop so far. Japan tried bringing little “fun” to this monotonous picture, where on the 23rd of May Nikkei 225 index dropped by 7.3% during a single day, and by 5.2% more a week later, but the attempt was unsuccessful, since the US and European markets pretended nothing has happened.
Manager of the stock funds kept to holding strategy, retaining part of the fund’s assets in cash to be later used for buying when decline occurs. We consider the probability of correction to be rather high currently, since the investors’ activity will decrease given the vacation season, and this will also lessen the major growth factor – inflow of cash. This, in turn, can lead to market consolidation.
While it can be said that nothing interesting happened in the global stock market (except Japan), the events in the global bond market were quite considerable. The first half of the month was marked by slow correction, following the growth in the previous month, since there were almost no factors able to push the market in one or other direction. However, the situation changed dramatically on the 22nd of May, after the minutes of the previous US FRS session were released, containing clear indication of the regulator being ready to gradually terminate the QE programme, given continuing improvement of macroeconomic indicators. The news caused sale of the US government bonds, which in turn made very strong pressure on the government bond market of emerging countries. Consequently, the price of US 10-year government bonds decreased by about 4% over the month, which was one of the worst results during the last 20 years (earlier, this happened due to various reasons in February 1994 and in July 2003).
Rapid change of mood in the global bond market affected almost all segments, from government bonds of developed countries to bonds of emerging countries in their local currencies, because short-term speculators joined the game. For example, losses of the US high-yield corporate bond market amounted to about 3%, those of the government bond market of emerging countries – approximately to 3.5%, etc. Markets of the bonds denominated in euro appeared to be more stable, which is most probably due to the market structure (low liquidity, not a lot of speculators, etc.).
Manager of the bond funds kept to holding strategy, since the funds had rather low average duration and sufficiently high cash component. Nevertheless, price decline in the sector of government bonds of emerging countries appeared to be much stronger than we expected, and therefore ABLV Emerging Markets USD Bond Fund results over the month were highly negative, although much better than those of the market.
Currently, we do not see reasons for panic. In our opinion, price decline during the last week of May was rather caused by technical factors than fundamental ones. Therefore, current situation is favourable for buying the most attractive bonds.
The funds’ performance results as at 31 May 2013 can be found at ABLV Bank home page in section “ABLV Mutual Funds”.