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

Riga, Latvia, September 3, 2014, 11:00 / Investments

In the beginning of August, the global financial markets were heavily under the influence of geopolitics with reference to new escalation in the ‘sanction war’ between West and Russia. Russian sanctions launched in response — the ban to import food products, mostly hurt the EU states and made investors think over prospects of European economy development, taking into account not really impressive current economic situation in many countries.

In turn, bold political statements made by the Ukrainian government about possibility to impose their own sanctions put under question reliability of Russian gas supply to European consumers. Against this news background, securities markets of the majority of leading European countries experienced serious fall, that in turn, to a lesser degree, but negatively influenced the global stock market.

However, passions did not last long, and the market members again paid attention to macro- and microeconomics, where the situation looks pretty well and continues to show signs of improvement. Nevertheless, in August, unlike in July, in the macroeconomic reports of the leading global economies the signs of slowdown in global economic growth appeared; on the micro level, the situation still seems to look pretty good, this is being evidenced by the coming to an end season of Q2 2014 corporate reports.

Furthermore, in the second half of the month, the annual central bank symposium in Jackson Hole took place, where the monetary policy plans of leading central banks were announced. Following the results of the summit, investors came to a conclusion that the policy of the global central banks is still focused on keeping interest rates low, which will support the global economy and stimulate its growth. Buyers returned back to stock markets, leading by the end of the month many securities markets won back losses of the beginning of the month and showed decent growth.

The manager of the stock funds acted in accordance with chosen earlier strategy. As we have predicted, the correction in August turned to be technical. Therefore, using this situation, the manager of the stock funds decreased cash level in funds portfolios. In the funds of the global stocks market purchases were concentrated in the indices of emerging countries and USA that are being less influenced by geopolitical tension in Europe. At the same time, the share of European assets was decreased, as it is being heavily exposed to geopolitical risks. In the portfolios of industrial funds, the share of “cyclic” sectors was increased on the background of anticipating continuing economic growth. The current strategy in the stock funds is the strategy “to keep” with available tactic decisions to fix the profit at certain positions in order to correct the portfolio structure.

In August, the global bond market was influenced by the same factors as the stock market; therefore, the dynamics of these two markets were similar. There were price decrease and spread widening in the beginning of the month, price increase and spread narrowing in the second half of the month due to easing geopolitical tension, as well as the continuing decline in yield of US and German long-term government bonds against expectations of low inflation.

Promises given by the Heads of the leading countries Central Banks about maintaining longstanding period of low interest rates make investors search for financial instruments with high yield that creates demand in the markets of corporate bonds and government bonds of emerging countries. And then geopolitical factors fade into insignificance.

Bonds of Russian and Ukrainian issuers stand apart, still being under sellers’ pressure. Within the whole month, these markets were following general dynamics, however, dramatic escalation of the war conflict in the South East of Ukraine in the end of the month caused intense sales, and by the end of the month it resulted in negative yield in these market segments. The managers of the stock funds continue to stick to the moderate strategy of investing in bonds with high coupon yield and issuers with reliable credit profiles.

In turn, the behavior of the Russian Eurobond market in the current situation is fully determined by the developing situation in Ukraine and the reaction of Western countries, therefore to predict the price dynamics in short-term is rather difficult. The strategy in this market segment is “to keep”, further actions will depend on the development of events.

Ilmārs Jargans
Head of Public Relations Department
+371 6777 5296