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

Riga, Latvia, July 7, 2015, 10:44 / Investments

June turned to be very stressful for the global financial market. In the first half of the month, everybody waited for FRS meeting, following which more or less clear signals should have been given regarding the prospects of interest rates growth in the USA. There were some fears that the rhetoric of FRS representatives could have been rather strict, therefore, in the majority of markets, both equity and bond ones, negative tendencies prevailed, and this resulted in the price decline. However, in reality everything turned less tragic. The announcements of the regulator’s representatives were milder than expected, moreover the long-term benchmarks of interest rate were decreased that lessened tension in the market and caused the price return.

When the position of the US FRS became clear, the Greek debt drama returned to the front ground. The negotiations between the Greek government and the three lenders of the IMF, ECB and the European commission were tough. The sides could not reach any agreement. The information that appeared in the news was also controversial and caused the upsurges of volatility in the financial markets. Every time as soon as the next deadline for reaching an agreement between the Greek government and its lenders was approached, this “final” deadline was postponed. In these conditions, one could have had an impression that investors started to sell European shares exclusively following tweets in Twitter. Any encouraging announcement from any of the Finance Ministers of the euro area about significant progress in the negotiations with the Greeks was followed by the growth of exchange indexes. However, any negative comment regarding this issue in the same Twitter led to the exchange indexes’ drop. Nevertheless, the majority of the market’s members including our company expected positive solution in this issue. However, on the last Saturday of the month, the Greek Prime Minister Aleksis Tsipras surprised everybody by announcing the referendum for or against the terms of the lenders. This outcome of the drama that has lasted for many months dropped a bomb on the financial markets. On Monday, investors started to sell risky assets in panic being scared by revealed uncertainty. At the end of Monday, the European exchange indexes dropped by 3.5–4% (within the day this fall exceeded 5%), and it became the maximum of daily fall of the regional indexes since 2011. The US markets and the markets of emerging countries suffered from the European panic as well, and following Europe they dropped by 2% within a day. In the corporate bond market and the bond market of emerging countries, a significant price decline and the widening of spread took place.

As a result, within two last working days in June, the European fund index Eurostoxx 600 lost 3.92%, the American index S&P500 lost 1.83%, having “performed” within these several days practically their month decline, which equalled correspondingly 4.64% and 2.10%. However, it is worth noting, when in Europe all sectors showed negative results, separate sectors in the USA, such as retail, regional banks, insurance, pharmaceuticals, biotechnologies managed to show positive closure of the month. The sectors of extraction and processing of minerals, technologies and public utilities were worse than the market, both in the USA and Europe.

In the global equity market, besides the events around Greece, a lot of attention was paid to the internal securities market of China (Shanghai and Shenzhen). In spite of the fact that the presence of international investors is rather minimal in this market, the American rollercoaster could not remain unnoticed. If the main exchange index of Hong Kong declined by 4.3% (this decline was proportionate to the general dynamic in the global equity market), then indexes of the internal Chinese market dropped by more than 17% within two weeks. Several days the exchange indexes dropped by more than 5% and with the same speed grew back. Moreover, it happened within one trade session. This high level of volatility indicated a rather unhealthy situation. In our opinion, the range of segments in the Chinese internal securities market may be called bubbles. For example, the index Shenzhen Composite since the beginning of the year has grown by more than twice mostly due to loan financing. The average price-earnings ratio of companies shares (P/E) in many indexes exceeded 20. Besides this high value, it is significantly higher than the average of the last five years (around 12). Therefore, a rapid fall of stock indexes does not surprise. The evaluation of stocks that are being traded in Hong Kong is on an “adequate” level (P/E is around 12). In this context, we believe, despite the possibility of the continuation of these chaotic movements in short-term, China (stocks that are being traded in Hong Kong) will remain attractive to investors, as the expectation and the actual beginning of its stimulating programme will have to positively influence the value of companies.

In the global market of corporate bonds and bonds of emerging countries, the main influence was committed by the same factors that influenced the equity market. The global risk off situation caused the growth of risk premium (the widening of spread) practically in all segments of the market. In addition, extra pressure on prices was caused by the growth of yield in long-term German and American bonds (Bunds and US Treasuries), as released macroeconomic data was not bad and due to the growth of inflation expectations. Despite the prolongation of the EU sanctions, Russian corporate bonds were better than the market, especially the ones denominated in roubles. 

At month-end, all funds (except ABLV High Yield CIS RUB Bond Fund) showed negative yield (starting from -1% of the bond funds and up to -4% of the stock funds) that corresponds to the general market dynamic. Nevertheless, we are not inclined to be pessimistic now and we continue to believe that a current fall of securities markets is of rather short-term character. It goes without saying, the recovery of growth in the equity markets is possible when some kind of clarity is achieved in the Greek issue. We hope for positive outcome. However, even if the situation gets more tensed, panic witnessed on last days of June will be temporal and will ensure good moments for purchases.

Within this framework, our managers of equity/stock funds (in accordance with the investment policy of each fund) using the price decline reduced the share of monetary assets. They preferred cheapening European shares, as we believe despite current problems regarding Greece, Europe remains the region that can significantly exceed current low expectations of macroeconomics development. In addition, we take into account the fact that the QE programme by the ECB is only temporary on the background, the pressure on bond yield will soon recover, and the search for alternatives brining higher yield will become actual again. Here, in the context of risk and yield, shares, in our opinion, offer a good balance.

At the same time, we reduced the positions of several emerging countries, in which we observe increasing local risks (for example, the risk of re-election in Turkey, in case they fail to form coalition government). We reduced the positions of the countries that are under the risk of currency exchange pressure that will neutralize the yield of investments in fund indexes of these countries.

In the bond funds, we continue to follow the strategy “to hold”. Preferences are given to middle-term duration bonds, as they are most secured in the current market conditions.

the beginning
of 2015 (YTD)
2014 2013 2012 Annualised
return since
the inception
Government Bond Funds          
ABLV Emerging Markets USD Bond Fund 3,32% 2,75% -3,94% 15,63% 5,08%
ABLV Emerging Markets EUR Bond Fund 2,45% 1,83% 0,92% 15,88% 4,05%
Corporate Bond Funds          
ABLV High Yield CIS USD Bond Fund 20,32% -16,58% 2,20% 17,96% 4,74%
ABLV High Yield CIS RUB Bond Fund 18,32% -10,21% 7,00% - 5,73%
Global Market Corporate Bond Funds      
ABLV Global Corporate USD Bond Fund 1,70% 0,34% - - 1,95%
ABLV European Corporate EUR Bond Fund 1,27% 3,30% - - 4,01%
Stock Funds          
ABLV Global USD Stock Index Fund 0,82% -0,26% 10,24% 9,33% 1,93%
ABLV Global EUR Stock Index Fund 7,55% 3,84% 3,26% 11,67% 0,32%
ABLV US Industry USD Equity Fund 0,94% 6,95% - - 6,88%
ABLV European Industry EUR Equity Fund 9,83% 2,09% - - 7,62%
Total Return Funds          
ABLV Multi-Asset Total Return USD Fund - - - - -6,69%

Mutual funds’ return as at 30.06.2015:

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