In July, global financial market remained rather volatile, and positive trends prevailed. At the beginning of the month, referendum was held in Greece to decide whether the country should agree to the creditors’ preconditions for providing another financial aid tranche to Greece.

Since the preconditions included tax increase and cuts on state social protection, most Greeks predictably voted against those. Nevertheless, the decision made by Greek nation did not discourage the creditors, and they continued to stick to their guns in negotiations. Therefore, in the middle of the month agreement on new financial aid programme in exchange for implementation of reforms was reached with the government of Greece. Current Greek debt has not been written off yet, but promises to decrease pensions and other social allowances, increase taxes and gain more income from privatization of some state-owned property were made. This means the creditors actually try to improve the ability of Greece to service its debt and not just rely on new tranches. This will unlikely be enough – the debt of Greece is too large and economy too weak, that is why creditors will most probably resume discussions on writing off part of the debt to facilitate recovery of Greek economy. The promised reforms still need to be implemented, but the fact of reaching agreement was appreciated by financial markets – avoidance of Greek default caused growth in stock and bond markets, especially European ones.

The other source of concern for investors was the continued drop in securities market of China and Hong Kong. Over the month, major stock index of Hong Kong lost about 6% (occasionally declining by more than 10% during the month), and main index of Shanghai Stock Exchange (Shanghai Composite) decreased by 14%. Worried about such significant drop in stock value, the Chinese government was quick to interfere by implementing a number of measures to support the market – the Central Bank of China reduced the key interest rate, provided liquidity for brokerage and financial companies, and started buying the stocks up in the market. Moreover, non-market techniques were used, such as prohibition to sell stocks of a number of companies. This active stand taken by the regulatory authority stopped the market decline but failed to ensure its growth. As we pointed out in last month, a number of Chinese market segments (this is true for stocks of small and medium enterprises) can be considered a financial bubble, and high volatility of this market is not surprising. Nevertheless, we consider Hong Kong companies and large Chinese enterprises to be rather attractive in terms of their fundamental evaluation and believe that investments in securities market of China and Hong Kong are promising in the long term.

The weakness of Chinese stock market added to capital outflow from other emerging markets, which made pressure on stock markets and currencies of emerging countries. The interest in risky assets, primarily in emerging countries, declined, given the reduction of oil and metals prices. Chinese economy slowdown is also mentioned as one of long-term factors. As far as oil is concerned, there is a significant overproduction, since OPEC countries tend to keep hydrocarbon production at maximum level, despite their low prices.

In July, corporate reports for Q2 2015 began to be released in the USA and Europe, and those evidence that the situation remains positive at microlevel – the companies’ profits grew by 3% in the USA and by 5% in Europe, which is undoubtedly facilitated by cost reduction due to cheapening oil and metals. The released macroeconomic data also were mostly positive, and this increases the probability of the US dollar base interest rate increase by FRS this year.

The global markets of corporate bonds and bonds of emerging countries were mainly affected by the same factors as stock market. The solution arrived at in Greece caused growth of European corporate bonds, and risk premiums have decreased substantially (spreads have narrowed). The dynamics in other market segments varied, given the speculations regarding base interest rate increase by the US FRS expected to be made relatively soon. The bonds of emerging markets were under pressure of decreasing oil and metals prices.

Russian corporate bonds outperformed the market once again, despite declining rate of the rouble and the economy dependence on export of raw materials.

According to the results of the month, ABLV funds demonstrated mixed dynamics (from minus 0.5% under global market stock fund in USD to plus 3% under European stock fund), which is in line with overall market movements.

Currently, our opinion on further dynamics in securities markets remains to be moderately positive. The situation around Greece has been resolved, and we do not expect this factor to influence the markets shortly. The possible increase of base interest rate by the US FRS most probably has already been taken into account in current prices.

Therefore, managers of the stock funds (in accordance with investment policies of each fund) have increased the investments in stocks of companies of developed countries, expecting this segment to outperform emerging markets soon. Cheapening European stocks were preferred, since we still believe that Europe remains to be the region which can considerably surpass current low expectations of macroeconomic development. Although the ECB QE programme now is temporary taking a back seat, we consider the fact that pressure on bond yields will be soon resumed and search for other options ensuring higher income will be topical again. And in this regard we believe stocks to be ensuring optimum risk and return ratio.

Holding strategy is retained under bond funds. The bonds with average duration are preferred, since those are the most protected in the given market situation.

Mutual funds’ return as at 31.07.2015:

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