In the world’s financial market, December was marked by long-awaited termination of QE3 programme, announced by the Federal Reserve System (FRS).

This decision was a surprise for most market players, since termination was expected to be launched not earlier than in February–March 2014. However, the FRS apparently decided to make a Christmas gift for everyone. It was obvious that the quantitative easing programme is about to be terminated because of the US strong macroeconomic indicators, although there were many questions about terms and volumes of making it. Therefore announced parameters of this process (total reduction by $10 billion: $5 billion under purchase of mortgage securities and $5 billion – under government securities) eliminated concerns about possible negative consequences for economy. Especially since it was once again stated that further actions of the FRS will depend on macroeconomic data.

Stock markets responded to this decision quite positively. Whereas in the first half of the month there was correction observed in most major markets, which was most likely due to recording profits and overall decrease of activity, after results of the US FRS session were announced, buyers returned to the market, which resulted in growth in the markets of developed countries over the month. Unfortunately, markets of emerging countries were put under pressure once again, first of all due to another drop in local currency rates, leading to negative yield.

As for 2013 in general, the developments in the global stock market were varied. On the one hand, stock indexes of developed countries, especially those of the USA and Germany, demonstrated rampant growth, reaching historical maximum, but on the other hand, major stock markets of emerging countries showed a decline or a minor increase. Furthermore, rates of local currencies of most emerging countries dropped considerably (emerging countries currency index JPM EM FX declined by 8% over 2013), leading to the overall decrease of MSCI EM stock index by 5%.

Last year the situation in the global bond market was even worse. While in the stock market some indexes dropped and other rose, in the bond market decline affected all segments. Such market dynamics were caused by statement made in June by the FRS head Ben Bernanke about possible termination of QE3 programme, which resulted in massive cash outflow from the bond markets of emerging countries. Most pressure was sustained by government bond sector, which is highly sensitive to increasing yield under the US government bonds. And while interest income compensated for price decrease in the corporate bond segment, it was not sufficient in the government bond sector.

In the market of the bonds denominated in euro the situation was slightly better due to continuation of the ECB stimulating monetary policy.

In the first half of this year we expect current trends to be preserved. In the global stock market funds, major positions are still retained in ETFs of developed countries, given high cash inflow to these markets. When investing in particular ETFs of emerging countries, most attention is paid to minimization of currency risks, since in our opinion those risks are the highest ones in current

situation. In industry-specific ETF funds it is planned to decrease cash component as much as possible, expecting the US and European stock markets to maintain growth.

We expect stabilization in the bond markets, since pace and scope of ceasing stimulation measures became more or less clear, which should ease the increased nervousness of investors. However, we continue to keep to moderate strategy, under which bonds with low and middle duration and high coupon yield are preferred.

The funds’ performance results as at 31 December 2013 can be found at ABLV Bank home page in section “ABLV Mutual Funds”.