In March, global financial markets demonstrated positive mood which emerged in the second half of the previous month. Support provided to the markets by the ECB and FRS eventually affected investors. On 10 March, during its meeting, the ECB lowered the refinancing rate from 0.05% to 0.00%, the deposit rate from -0.3% to -0.4%, the credit interest rate from 0.3% to 0.25%, as well as announced the expansion of the quantitative easing programme from EUR 60 to 80 billion per month including corporate bonds and new series of targeted long-term repo operations (TLTRO) for a term of 4 years.

These measures slightly exceeded expectations, so the first reaction of the markets was more than positive. However, at the further press-conference, the president of the ECB, Mario Draghi, made it clear that the above-mentioned stimulating measures were the very maximum given the current situation, which immediately made capital market indexes to drop. Such behaviour of market participants indicates that the shock of January events is still there and the nervousness level remains very high. An additional confirmation from the “older brother” was needed and it was received upon the meeting of the FRS on 16 March. As expected, the rates were left the same, though the long-range forecast of the rate and inflation development was lowered. At the concluding press-conference, the Chair of the Board of Governors of the FRS, Janet Yellen, emphasized the global economic instability, which may bear risks for the economy of the USA in despite of its current rather good condition. Such announcement was treated very positively by investors and led to the rise of prices for almost all classes of assets.

Emerging markets, both stock markets and bond markets, became the “superstars” of the month. The value of the comprehensive emerging markets index MSCI EM increased by more than 12% in a month, and such result is significantly better than the one of the developed countries. An important factor which contributed to the growth of the shares of emerging countries was the recovery of prices on commodity markets. Although raw materials companies are not the major players in MSCI EM index in general, the correlation of raw materials markets with the emerging countries’ stock market remains high. Another important factor which led to the growth of the shares of emerging countries was the appreciation of local currencies against the US dollar, which increased by 5% on the average making it the highest monthly increase for the last 4 years. One should separately highlight the dynamics of the exchange rate of the rouble and Brazilian real, which appreciated against the US dollar by 11.5%. Generally, variable forecasts regarding the increase of the rate by the FRS significantly changed investors’ mood not only in respect of the US dollar (the exchange rate of the Euro has also increased by 4.7% in a month) but also in respect of other classes of assets. It certainly positively affected emerging markets and led to increased investments to EM funds, while the stock markets of Europe and Japan suffered the contrary effect as the increase of the exchange rate of the Euro and Yen put pressure on exporters, which resulted in the stock markets of these countries significantly falling behind.

The actions of the FRS and ECB, as well as the general events on the global financial market, caused euphoria on corporate bond markets and bond markets of emerging countries. Taking into consideration that the mentioned markets have been under high pressure for the last two years and bond prices remained at very low levels, investors started to buy everything possible in a hurry. However, it turned out it was not that easy to buy as the market maintains very low liquidity and the buyers have to pay as much as the sellers requested, a “take it or leave it” situation. This resulted in the jump in prices, especially in High Yiеld sector, although High Grade bonds were also excessively demanded due to the lowering of the return on American and German government bonds. The increasing prices for energy resources and metals contributed to a better dynamics demonstrated by both corporate and government bonds related to oil development and metallurgy industry. In general, corporate obligations increased more than the government ones, which led to their oversale at the beginning of the year, as well as positive dynamics on stock markets.

As investments to bond funds under the management of ABLV Asset Management were made in advance, all funds demonstrated rather significant yield at the end of the month (2 – 4%).

In the short-term, we expect market consolidation upon quite good increase in the previous month. The overall situation, especially regarding bonds of emerging countries, is still positive as, despite impressive drop in returns and narrowing of the spread, the prices remain at the levels which are rather beneficial for long-term investments.

Mutual funds’ return as at 31.03.2016:

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”.