In the financial markets January appeared to be depressing. For the global stock market the beginning of the year was among the worst ones in recent decades. Sharp drop of prices in the markets once again started with the collapse at the Chinese stock exchange.

Panic broke out in the wake of published data on business activity in Chinese industry, which was somewhat below the investor expectations and evidenced worsening economic situation in the country. Moreover, stock exchange players got worried about planned cancellation of temporary prohibition to sell shares for large shareholders in China, which might cause additional pressure on the quotations. Consequently, it was a ‘pleasant’ surprise for European investors coming back after long holidays and finding on the very first day that trading in Shanghai was suspended at minus 7% reached. The point is that from 2016 new rules of securities market regulation are effective in China, and according to those trading is suspended for 15 minutes if indexes change by more than 5%, and where 7% is reached, the regulatory authority stops the trading until next working day. What would happen if the trading was not stopped is anybody’s guess, but short-term players apparently decided not to tempt fate and unanimously pressed the button ‘sell’. As a result, on the very first day German DAX lost more than 4%, and other markets sought to keep up with it. On the following day, everything seemed to ease a bit, but as trading in China reached minus 7% and was suspended once again a day later, nerves of the majority frayed, leading to the collapse at almost all main stock exchanges. Just over 2.5 weeks, stock indexes lost from 11% in the USA to 15% in Japan. Besides difficult situation at stock exchanges, investors also kept a close eye on oil quotations, which reached lows of several years in January. Cancellation of sanctions against Iran, high OPEC production quotas, and moderate global oil demand – all this put the oil prices under pressure. Investors treated decline of oil prices as a sign of global economy weakness, which added to negative moods in the markets.

In this situation, largest central banks came to rescue as usual. The first one to ease the tension was the ECB. Although no particular steps were taken at the meeting held in January, the statements by the ECB President M. Draghi were highly welcomed by financial markets. Besides the promise to expand the quantitative easing programme in March, the ECB also allowed the possibility of further interest rate decrease. Then the US FRS abstained from increasing the interest rate at the meeting in January, mentioning the concerns about low inflation and promising to take further actions guided by the situation in the world economy and financial markets. And finally, CB of Japan picked up the baton, suddenly decreasing key interest rate to negative value and bringing hope to investors that further measures for stimulating the economy and financial market will be strengthened. Such powerful ‘counterattack’ of the world’s leading central banks helped stopping the panic and even encouraged the markets to regain half of the losses during last week of the month. Nevertheless, the results of the month remained deplorable. The US market lost 5%, Europe – 7%, and Japan – 8%. The stock funds managed by ABLV Asset Management demonstrated corresponding dynamics.

Similar situation was present at the markets of corporate bonds and bonds of emerging countries. The main reasons for price decline there were also said to be Chinese economy slowdown, yuan devaluation, price drop in raw materials markets, and negative dynamics at stock exchanges. However, in our opinion, the main reason still was the emotional aspect and low liquidity, not the fundamental factors. Prices of bonds of virtually all issuers were declining, regardless whether the issuer is oil exporter or importer, has high or low debt burden, etc. All this went by the wayside. And even such highly important factors as negative rates, decline of return on the US and European government bonds, revised probability of rate increase by the FRS (while at the end of December few doubted four increases in 2016, now many are not sure whether there will be at least one) were ignored by the investors. And exactly this made pressure on the global bond market during last two years. But when everyone is escaping the risk, all the rest is usually abandoned. Even the prices of investment-grade bonds, which are the most sensitive to the US Treasuries and Bunds dynamics (the return on those going down significantly), just managed not to fall or experience minor fall.

In the short-term, we expect continuation of high volatility in both stock markets and bond markets. The shocks of January were too big for the markets to turn quickly. First, stabilization is needed. Nevertheless, we consider current situation to be favourable for making long-term investment portfolio, since the emotional surge of sales also affected good-quality assets, the price level of which is now very attractive in terms of risk-return ratio.

Mutual funds’ return as at 31.01.2016:

¹ Except ABLV Multi-Asset Total Return USD Fund and ABLV Emerging Markets Corporate USD Bond Fund, for which return is calculated on funds’ period of operations.

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