In April the situation in Ukraine remained the centre of attention. The tension in the Southeastern region of Ukraine was considered by the USA and the EU as a reason to prepare new, stricter economic sanctions against Russia, therefore bonds of Russian issuers continued to remain under pressure.
In the anticipation of four-party negotiations in Geneva on the situation in Ukraine a hope for peaceful settlement appeared. However, in reality, prior agreements were not observed, so “Geneva Agreement” could not stop armed stand-off in the Southeast of Ukraine.
Another negative factor for the bonds of Russian issuers was the downgrade of Russia’s credit ranking by the rating agency Standard&Poor’s to the lowest investment rating BBB- with negative outlook. Standard&Poor’s backed up this decision by the escalation of the Ukrainian crisis and its negative influence on the Russian economy. Following the sovereign credit rating downgrade, the credit ratings of largest Russian state companies were downgraded to the similar level. However, at the end of the month announcement of milder sanctions against Russia than expected resulted in the stabilization of sovereign Russian bonds, but it did not release negative pressure in the anticipation of further development of events.
The markets of global corporate bonds and government bonds of emerging countries in general followed the actions and comments of the official people of FRS and ECB. The head of FRS reported that the economy of the USA would require special aid for a certain period of time; investors interpreted this message as a perspective for longer period of low interest rates. The representatives of ECB continue to highlight that they are ready to use new tools of the stimulating monetary policy. This news background promoted a successive wave of “yield hunting”, which resulted in the growth of prices practically in all segments of the bond markets, denominated both in US dollars and euro (excluding Russia and Ukraine). Especially high demand was witnessed in the sector of speculative high-yielding bonds that outperformed.
The managers of bond funds continue to follow the strategy of investing the main part of funds into bonds with high coupon yield and relatively low duration. Taking into account the dynamics and moods in the market, in the emerging government bond funds the duration of bonds was prolonged in order to reach the level of the market one. As earlier we consider Russian Eurobonds to be heavily resold, but at the same time we don’t exclude a possibility of a certain decrease in prices in case the situation in the Southeast of Ukraine worsens.
The global stock market, as we expected, continued to consolidate in a narrow diapason. Buyers and sellers reached balance, as a result of which the market could not decide on further directions. News background is rather dubious thus complicating investments decisions. For example, the corporate reporting season of Q1 2014 shows that the situation in America at the micro level of the previous quarter was better than in Europe. Macroeconomic indicators announced in April, on the contrary, show improvements in the European economy, rather than in the USA, which indicators are varied.
The FRS management gradually decreases economy stimulating measures, and from ECB new measures of monetary policy softening are awaited. The geopolitical situation around Ukraine even though does not seriously affect the world market, but it does not give grounds to remain calm. These and other factors led to the situation at which main stock indices did not practically change at month-end.
In accordance with tactical decisions taken earlier, managers of stock funds decreased the ratio of cash in the funds’ portfolios. In the portfolio structure of global funds the ratio of emerging countries was slightly increased in regard to a growing interest in these countries from investors. We would like to remind, last year the market of emerging countries showed falling behind developed markets dynamics, and now it looks relatively “cheap”. In the portfolios of industrial funds the ratio of the sectors which experienced a deep correction in the period of market consolidation was increased.
In middle-terms we adjust our strategy from “accumulate” to “hold”. Our further actions will depend on events in the global stock markets and geopolitical situation. If target levels are reached, yield fixation on separate positions is planned.