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

Riga, Latvia, November 5, 2014, 13:30 / Investments

It has been so long since we last saw such amusement as this “rollercoaster” in the financial markets. That is how the situation settled in October in the global stock markets can be best described. As a result of this rapid growth of volatility, investors, used to calm and steady sequence of events, started to panic.

The stream of very negative macroeconomic data from Europe marked the start. It is worth admitting that already prior news did not bring any joy to market participants, but, at any rate, such key player as Germany showed rather good results. However, in October, the situation affected it as well. Reported in the beginning of the month German data turned to be significantly worse than expected, and it immediately affected the European stock market. The US market continued to remain stable in the anticipation of the beginning of the season of corporate reports, however, eventually it did not withstand the pressure of sellers, and as a result within only five trade sessions, S&P500 index collapsed by 7.5%. In the middle of the month, the climax was reached with a rapid drop-down of US Treasuries, when within several hours 10-year bond yield dropped down by 0.36% that corresponded to the price growth over by 2%.

However, then the American stock market witnessed an abrupt turnabout, supported by the Federal Reserve announcement about inevitability to support the US economy if the economic situation in the country worsens. It became apparent that the correction was purely technical, and buyers returned to the market on a massive scale, giving the impression that everybody was afraid to be late. As a result, stock indexes started to grow as fast as they were falling. Within two weeks, the US securities market grew by 10%, not only winning back losses of the beginning of the month, but approaching the historical maximum! Besides, on the last day of the month, the Bank of Japan also took an ace up its sleeve by unexpectedly increasing the program of quantitative easing from 50 to 80 billion Yen. That news resulted in an explosive growth of the Japanese stock market. To put it in a nutshell, it was fun. A worse situation remained only in the European markets. The index of Eurostoxx 600, although having grown from the bottom as well as the American S&P500, but taking into account that its fall was one and a half times stronger, did not manage to win back all losses at month-end. Falling behind dynamics of Europe is easy to explain, as both micro- and macro- statistics leave much to be desired.

The situation in the global bond market was influenced by psychological factors rather than fundamental ones; therefore, the dynamics of separate market segments to a large extent reflected the situation in the American financial market. The stock market disruption put strong pressure on prices of both US and other countries high-yield bonds. In turn, drop-down of American and German government bonds encouraged the price growth of government and corporate bonds of “investment grade”. Simultaneously with the turnabout in the US markets, things rapidly started to change in the global bond market. At the month-end, the markets of corporate bonds and government bonds of emerging countries reached the levels of the beginning of the month.

Under the conditions described above, the manager did not take any active actions, as there is always high risk of making wrong investments decisions in the situation of excessive nervousness in the markets. Among important tactical decisions, using this favourable situation the risk of interest rate growth in the USA was partly hedged in ABLV Emerging Markets USD Bond Fund. Positions of the bonds with high investment ratings were hedged along with those which dynamics was strongly affected by the dynamics in the US Treasuries market.

Owing to an intensive flow-in of investors’ funds in the corporate bond funds, within the month the cash level was significantly increased. Therefore, the decision was made to increase the share of blue chips with good liquidity out of these funds, in order to adjust strong fluctuation of the value of fund’s shares in case the situation in October ever repeats. In the Russian Eurobond market the price stabilization is being outlined. Due to geopolitical factors, this market seems to be still noticeably oversold with a weak reaction to the drop-down of the ruble and the decrease of oil prices.

Ilmārs Jargans
Head of Public Relations Department
+371 6777 5296