Mutual funds’ return as at 30.04.2015:

The comment of ABLV Asset Management, IPAS

April turned to be rather interesting for the global financial market. In the first half of the month, “trendy” tendencies of the year continue, namely, the growth of US dollar, the drop of German government bonds yield down to new records, the growth of main stock markets, mainly European, a “vertical” take-off of the China stock market. News background was rather neutral. At times, certain rush around Greek debts occurred, but it was rather because of the journalists who experienced the lack of serious news to report about.

The most interesting events happened on the last days of the month right after the release of US GDP data that turned to be much worse than expected (the total growth of 0.2% instead of expected 1%). This news caused a rapid growth of EUR exchange rate and, in its turn, it provoked the fixation of profit in the German stock market. In the previous comment, we pointed out that investors started more and more to pay attention to EUR exchange rate. Therefore, a rapid growth (around 2.5% within two days, and 4.5% a month) caused sell-out of European companies-exporters shares (car industry, chemical sector, technologies). As a result, the German Stock Index DAX30 within last days dropped down by almost 5%, showing the worst result of all main stock indices that we monitor.

The season of corporate reports passed more or less smoothly without serious negative surprises. In the USA, on the average of S&P500 index (70% of companies reported) the growth of profit comprised yet 3%, without including power companies with 9%; in Europe on the average of STOXX Europe 600 (52% of companies reported), the growth of profit comprised 6%, and in Japan, according to Topix index (44% of companies reported) the growth of profit amounted to 8%. So that, at the micro-level, in the most of developed countries, from the fundamental perspective, everything looked not bad. A different story is that all these markets have already grown sufficiently well; therefore, investors are looking for additional opportunities to invest and it results in growing selectivity, both in the choice of a country and sectors within the frames of one stock market. This results in rather differently directed movements of various stock indices at different moments of time.

In the global stock market, strong outperforming dynamics of the stock index of emerging countries (7.5% versus 2.2% of the total world index) became an April peculiarity. The main achievement belongs to China and Brazil that make up 30% of MSCI EM index. Besides, due to stabilization and price growth on raw materials, a serious correction took place in the currency market in which currency exchange rates of the most emerging countries grew towards US dollars. Furthermore, a keen interest in the Asian stock markets was observed, in general, resulting in the flow of money into these markets. All these factors led to a serious growth of MSCI EM.

Against the background of growing prices in the commodity markets, primarily of oil and industrial metals, the growth leaders, both in the USA and Europe, were the stocks of companies from the corresponding sectors. Due to good corporate reporting, an outperforming dynamics was shown by the sectors of US technologies and telecommunications. In its turn, a falling behind dynamics was shown by the stocks of companies that are oriented on internal consumption owing both to worsening macroeconomic data in the USA and not quite spectacular quarterly reports.

Fund managers continued to follow a chosen earlier strategy “to hold”; some tactic actions were implemented in order to optimize the structure of the funds’ portfolio. The conspectus on the global stock market remains moderately positive, however, taking into account high “selectivity” in the markets, more aggressive actions are on the cards to either increase or decrease the proportion of certain ETF shares in the funds.

In the global bond market, Bunds, German government bonds defined the main tendency. In the first half of April, 10-year Bunds achieved an absolute record having reached the yield of 0.05%, at that already 8-year securities were sold with negative yield! This dynamics encouraged the retention of low yielding of other government bonds of developed countries, including American, despite of the expectations of the rate increase by FRS in June or in autumn at the latest. However, at one point the scale fell from the investors’ eyes, if we may say so, and they realized that negative yielding of 7-8-year bonds, even German ones, is not normal. The number of market members willing to pay for lending shrank radically, and that led to a technical correction that sharply strengthened (also in other markets) at the end of the month when the yield of 10-year Bunds within two days went sky-high by 20 basis points (from 0.16% up to 0.36%). The proof for this market being now the main one was the fact that on 29 April very bad data of US GDP was reported and right after this news, the yield of US Treasuries should have fallen significantly as the prospects of rate increase by FRS were postponed till later. However, it turned out differently; the yield of American 10-year bonds also grew up by 10 basis points! In short, in the absence of any prospects regarding fast changes in the monetary policy of the ECB and FRS, April dynamics of US Treasuries and Bunds turned to be a big surprise for the majority of the market players.

One of the reasons for this dynamics is the reconsideration of inflationary expectations, more accurately the reduction of apprehensions regarding possible deflation. Firstly, the QE programme by the ECB should stimulate the economy of Europe and cause the growth of inflation. Secondly, the price growth of oil and industrial metals also reduce the deflation pressure. Moreover and thirdly, some first signs of potential growth of salaries in the USA started to appear (Employment Cost Index of Q1 2015 came out better than expected).

All the above-mentioned factors influenced correspondingly the markets of corporate bonds and of government bonds of emerging countries, primarily, the segment of bonds with High Grade in which a significant price decrease happened. Insignificant reduction of spread and higher coupon yield allowed this segment to stay in the positive area at month-end, but this plus was rather symbolic.

The main contribution to general positive results of the bond funds was made by the segment of high yield bonds, in particular, of emerging countries. Here, the first violin was played by the price growth in the commodity markets that encouraged investors to return their interest in oversold at the end of 2014 securities. As a result, the largest growth was shown by government bonds of such countries as Venezuela, Ecuador, Kazakhstan, Azerbaijan, Nigeria, etc. In the corporate sector, the securities of companies involved in the commodity markets were on high demand, therefore, Russian corporate bonds were among the leading ones. The absence of significant geopolitical news, the strengthening of rouble against US dollar and euro, as well as moderately good reporting from Russian issuers secured additional support to the market.

In the mid-term, we expect these tendencies to remain. The main attention of investors will be concentrated on the US macroeconomic statistics basing on which the market members will try to forecast FRS actions. The dynamics of German Bunds continues to influence the market. We assess a current correction to be technical, however, the levels at which it stops are difficult to forecast taking into consideration a strong price growth in the recent year.

Additional information is available at ABLV Bank home page in the section “ABLV Mutual Funds”.