In the global stock market, August turned out to be rather nervous and worrisome for investors. The first half of the month boded no ill, markets of Europe and China were gradually recovering after a slump at the end of July, US market indexes remained within narrow band close to record levels.
However, in the middle of the month, China disturbed the peace once again. A sudden change of monetary policy by the People's Bank of China surprised virtually any market player and caused sharp shift of mood. China performed small devaluation of its currency, and therefore the yuan rate against the US dollar dropped by more than 3%. Earlier, according to the country’s currency policy, official rate of the yuan against the US dollar was set solely by the central bank, allowing market rate deviations of up to 2%. Whereas now the regulatory authority announced that the yuan rate will be further determined according to the market rate as at the previous day closing, and intervention will be possible in case of necessity. Moreover, the Bank of China started intervention a couple of days later, because of which the yuan overall decline was quite limited. Analysts mentioned several reasons for change of the currency policy. Those included the intention to make the yuan an official IMF reserve currency, which requires more ‘freedom’ of the Chinese national currency, and the general wish to weaken the currency, since the yuan rate, actually pegged to the US dollar, has considerably risen against almost all world currencies during last year, and this causes negative impact on export competitiveness.Anyway, after so unexpected events, the market fever began. Currency rates and securities markets of Asian countries were hit first. Although there were no substantial fundamental reasons for it, the investors feared the beginning of new ‘currency wars’ because of the actions taken by the Central Bank of China, and future of the Chinese economy was questioned, raising concerns about the influence of these problems on the region in general. This being the case, market players began to dispose of risky assets on a massive scale, causing a substantial drop in most securities markets and in currency rates against the dollar and euro. The lack of stabilization measures by the Chinese government, though frequently employed by the same in case of securities market instability, has also added to the pressure put by the sellers.
In the given circumstances, the securities markets of Europe and the USA held on for some time, although a wave of sales with respect to several companies having a large part of proceeds in China took place on European venues. However, it did not last long – until penultimate Monday in August, which has been named ‘black’ or ‘dark grey’ Monday, whichever one prefers (depending on the losses incurred). On this day, Chinese market indexes plunged by 9%, main German index DAX also demonstrated a drop by almost 8% during the day (and recovered part of the value by the end of the day), which has not happened since 2008. Decrease of American index S&P 500 occasionally exceeded 5% during the day, which has not been observed since 2011, when the US rating was downgraded (trading in futures market was even suspended because of reaching down limit at minus 7%). Many mass media hurried to attribute all this to China, but it is not that straightforward in our opinion, at least because Chinese devaluation had been performed two weeks earlier, and it is doubtful that investors would need so much time to suddenly opt for selling everything on one day.According to opinion of some experts (and we tend to share this point of view), such ‘cataclysm’ was purely technical. And Monday events are the consequence of occurrences in the US derivatives market during two previous trading sessions (before that, on Thursday and Friday, S&P 500 fell by 5% for no apparent fundamental cause. August options matured on Friday, and strong imbalance between open positions arose in the market, the liquidation of which actually caused the index decline). This was the reason for simultaneous triggering of many so-called ‘robots’, i.e., hedge fund strategies applying specific algorithms. Those could not care less about macroeconomic indicators, corporate profit increase, relative value of stocks, QE programmes, etc. Their deities are gammas, alphas, volatility, standard deviation, and others. Therefore, volatility increase just triggered these algorithms. In our opinion, this is the only explanation of the insanity that followed in the US stock market (for example, S&P 500 dropping by 2% during an hour, and then recovering equally fast). Since August is the peak of holiday season, and market liquidity is one of the lowest during the year, the battle of ‘robots’ produced even more effect on the market and did not encourage optimism among investors around the world.
Anyway, losses of securities markets worldwide were very high over the month (MSCI World index declined by 6.81%, MSCI Emerging Markets – by 9.2%).Equal situation was present in the global bond market. Given increased nervousness, prices were dropping in all segments. It did not matter for the players whether High Grade or High Yield, exporter or importer of raw materials, Asia, Eastern Europe, or Latin America. The extent of price decline of particular bonds mostly depended on their liquidity. Only prices of German Bunds and US Treasuries remained stable – those have not increased (which usually happens when there is total panic) and stayed at the same levels at month-end. Apparently, ‘robots’ have not come at those yet.
Given the global fall in almost all types of assets, the funds managed by ABLV Asset Management demonstrated results similar to the market dynamics. Bond funds lost about 1-1.5%, stock funds – 5-8%. However, we do not tend to overdramatize current situation. First, before the beginning of powerful drop, managers of the stock funds had considerably decreased the positions in ETF (in global stock funds – emerging countries, in industry funds – due to tactical reasons), and therefore a rather large portion of cash was formed, which is positive in the given situation.Second, following a substantial correction, many markets and sectors became more attractive, retaining good prospects because of fundamental reasons. We do not rule out that high volatility will be maintained in the short term, and nevertheless we still see the potential of good stock market growth till the end of the year. Current strategy is to ‘buy low’.
In bond funds, ‘keeping’ strategy is maintained. In our opinion, current structure of the funds is the optimum one in the given market situation.
Mutual funds’ return as at 31.08.2015:
| Since the beginning of 2015 (YTD) |
2014 | 2013 | 2012 | Annualised return since the inception moment |
|
| Government Bond Funds | |||||
| ABLV Emerging Markets USD Bond Fund | 2,56% | 2,75% | -3,94% | 15,63% | 4,88% |
| ABLV Emerging Markets EUR Bond Fund | 2,63% | 1,83% | 0,92% | 15,88% | 3,98% |
| Corporate Bond Funds | |||||
| ABLV High Yield CIS USD Bond Fund | 20,34% | -16,58% | 2,20% | 17,96% | 4,64% |
| ABLV High Yield CIS RUB Bond Fund | 19,50% | -10,21% | 7,00% | - | 5,74% |
| Global Market Corporate Bond Funds | |||||
| ABLV Global Corporate USD Bond Fund | -0,15% | 0,34% | - | - | 0,97% |
| ABLV European Corporate EUR Bond Fund | 1,46% | 3,30% | - | - | 3,79% |
| Stock Funds | |||||
| ABLV Global USD Stock Index Fund | -7,54% | -0,26% | 10,24% | 9,33% | 0,84% |
| ABLV Global EUR Stock Index Fund | -1,22% | 3,84% | 3,26% | 11,67% | -0,74% |
| ABLV US Industry USD Equity Fund | -3,44% | 6,95% | - | - | 3,65% |
| ABLV European Industry EUR Equity Fund | 4,80% | 2,09% | - | - | 4,16% |
| Total Return Funds | |||||
| ABLV Multi-Asset Total Return USD Fund | - | - | - | - | -5,90% |