Management company comment about ABLV open-end mutual funds in July

Riga, Latvia, August 5, 2014, 14:00 / Investments

In the global stock market, July turned to be challenging, being influenced by various dynamics in the securities markets in different regions of the world. The US markets and markets of emerging countries felt quite stable.

The American Index S&P500, supported by positive macroeconomic data and good corporate reports, continued to top its historical maximum, up to a certain time ignoring a complicated geopolitical situation in Europe. However, after new EU sanctions against Russia came into force, nerves of investors were shot, thus causing large-scale sales on the last day of the month. As consequence, at month-end American securities indices showed negative yield.

Things in the European trading platforms were considerably worse. In spite of relatively good corporate reports, in the majority of main markets, geopolitics set the tone. The escalation of West – Russia confrontation after the MH17 plane crash, cruising from Amsterdam to Kuala-Lumpur, caused very negative investors’ reactions, thus resulting in the decrease in the leading European countries securities markets, primarily of Germany and France, and lasting the second half of the month. Following widening of sectoral sanctions against Russia only worsened negative moods. Investors started to feel serious concerns regarding outlooks of many European companies that have Russia as one of the largest trading partner and potential “back-fire” of sanctions on a partly recovered EU economy.

Against this background, securities markets of the majority of emerging countries demonstrated positive dynamics. The main factors for growth in these markets were the improvement of macroeconomic indicators in China and stimulating measures taken by the country’s authority, as well as the fact that the majority of emerging countries stayed aside from the geopolitical confrontation West – Russia.

In our previous comments, we noted that we evaluated the risk of correction as being high with the reference to a relative „overbought” market; for this reason a high level of funds remained in the stock funds. As July showed, our assumptions were correct. Nevertheless, taking into account micro- and macroeconomic background, we consider current correction to be technical. Therefore, using this favourable environment, the manager of the stock funds started to restore earlier closed positions. The priority is given to the emerging markets and US market as being least influenced by the geopolitical confrontation. In the industrial funds, preference is given to “cyclic” sectors against the background of continuous economic growth.

In the corporate bonds markets of the CIS states, the topical issue of the month, without any doubt, was the launch of the US and EU sectoral sanctions against Russia. Even though in June, this step from the EU seemed unlikely to happen, and the underestimated market of Russian Eurobonds was showing growth, the catastrophe with the Malaysian Boeing, along with active US position regarding new sanctions encouraged the EU to harden its attitude. In the middle of July, the USA announced applied sanctions against a number of Russian companies, including Rosneft, Novatek, Gazprombank and Vnesheconombank. These sanctions imply access restrictions to refinancing to the above mentioned companies in the American capital market, as well as the limitation in delivery of certain goods to Russia, including high-technological oil equipment.

The Russian Eurobond market reacted to this news by considerable fall. The bonds of the companies listed in the sanction note and bonds of the oil sector suffered most severely. In the end of July, the European Union announced the launch of sanctions mirroring in many points the US sanctions that increased the pressure on prices, including the Russian government bonds.

The global corporate bond market also experienced pressure in July and went down in the end of the month. The correction was caused by mutual decrease of “appetite to risk” in an unstable geopolitical environment. In the bond segment, denominated in US dollars, high-risk bonds of developed countries suffered most of all. The bond market, denominated in euro, was under additional pressure caused by growing concerns about the banking sector of Portugal and Bulgaria, as well as risks of fine sanctions to the main European banks from the USA.

The government bond market of emerging countries turned to be more stable, ensured by continuous fund flow. High-risk “exotic” bonds of African and Latin American countries that showed the highest price growth were in special demand. Buzz around technical default in Argentina practically did not affect the appetites of investors to this kind of bonds. Moreover, the Argentinean bonds showed the absolute best results at month-end! This owes to investors’ hope for favourable outcome in the issue of servicing Argentinean loans. Argentina transferred a complete amount to pay interest rates to the Bank of New York Mellon, where the funds will remain frozen upon the US court order. Entirely possible, in the nearest future the way out of this situation will be found.

At the moment, the general background in the global bond market looks quite indefinite. On the one hand, geopolitical tension and mutual decrease in “appetite to risk” put pressure on prices. In addition, in the first half of the year, bond markets showed intensive growth, therefore, the correction looks justified. On the other hand, the period of low interest rate in the USA and Europe continues, therefore, we don’t expect strong correction. Most likely, prices will be consolidated on current level. No doubt, investors will pay their main attention to Russian Eurobonds that continue to remain under pressure, and in the upcoming couple of months, their dynamics will be mostly determined by the escalation degree of political confrontation between Russia and western countries.

The managers of the stock funds continue to stick to the strategy of investing in bonds with high coupon yield and issuers with reliable credit profiles. At the same time, we will use this situation to buy underestimated, to our mind, securities.

Ilmārs Jargans
Head of Public Relations Department
+371 6777 5296