In June, the focus of the market players’ attention was the sessions of main central banks of the world and the UK referendum on the EU membership. However, it is fair to say that the results of central banks’ sessions were of much smaller concern for the investors, since no particular surprises were expected. The only thing that aroused some interest was the statement made by the FRS Chair Janet Yellen, namely, that ‘forces holding down interest rates may be long-lasting’, referring, inter alia, to the results of voting for Brexit.

Whereas major market movements this month were affected by announcement of different poll results before the UK referendum. During first half of the month, the markets were declining because of the growing number of Brexit supporters. However, in the middle of the month, the moods changed dramatically (some attribute this to the murder of Jo Cox – member of the British parliament and supporter of staying in the EU). The advocates of keeping the status quo began leading in the polls, and bookmakers estimated the probability of Brexit to be just 20-25%, which enabled the markets to compensate the losses sustained in the first half of the month. However, as it often happens the outcome was contrary to the bookmakers’ predictions. Before EURO 2016, the teams of Spain and England were among the four favourites to win the championship. In fact, both teams lost in round of 16, and the UK voted for leaving the EU.

The results of the referendum were rather shocking for the financial markets. On the following day, the pound sterling fell by 8% against the US dollar (reaching 30-year minimum) and by 6% against the euro. The yield of the US 10-year government bonds dropped to the minimum since 2009, amounting to 1.42%, and the yield of German 10-year bonds set a new record low at minus 0.15%. The fall of European stock market indexes exceeded 10% over two days, the prices of most commodities plummeted, while the price of gold surged. Such developments demonstrated how unexpected were the referendum results.

However, somewhat surprisingly, the panic ceased very quickly, and by the end of the month, most capital markets compensated substantial part of the losses, while British index FTSE 100 even demonstrated growth by 4.4% over the month of June. Major driver for such market behaviour was the understanding that Brexit, although being serious, is not immediate, and the whole process will take a long time; therefore, many short-term players considered the situation of panic and high volatility to be the right moment for closing speculative positions opened before the referendum.

Against the backdrop of panic in Europe and the USA, the emerging stock markets surprisingly looked much more secure. Over the month, aggregate stock index of emerging markets (MSCI EM) has increased by 3.3%, while the index decline following the results of British referendum amounted to just 4.90%, which is relatively little, compared to the drop by 10% in Europe. Usually, price fluctuations on emerging markets are higher than those on developed ones, since decline in capital market indexes is accompanied by decreasing local currency rates.

However, this was not true this time. Recently, emerging markets actually adapted the role of some safe haven, demonstrating striking resistance to shocks at stock markets of developed countries. The reason for this might be the fact that these markets have been under downward pressure over quite a long time and additionally emerging currencies already reached multi-year lows. Therefore, emerging markets currently become more attractive, given the political and consequently economic uncertainty in Europe, as well as rather expensive, from the fundamental point of view, stock market of the USA.

In June, corporate and emerging markets bonds were also impacted by growing volatility on global financial markets because of Brexit risks. The major outcome of all events in Europe was the substantial change in the expectations regarding projected key interest rate increase in the US. Just a little ago, when talking about rate increase months of this year (June, September, December) were discussed, while after the unexpected referendum results even the year 2017 is not mentioned, the earliest forecast is the first half of 2018. The arising uncertainty caused global drop in yields of the government bonds, and the news about negative yields seem no to surprise anyone anymore. Corporate and emerging markets bonds were also unable to evade this trend. Especially strong price increase was seen in longer end high-grade bonds. For some time, the segment of high-yield bonds was under the pressure because of high volatility equity markets and commodities, but eventually buyers returned to this segment as well, especially following the statement made by the Chair of the Bank of England about the readiness to ease the monetary policy due to the given uncertainty. The markets quickly absorbed the shock coming from Brexit and focused the renewed environment of long period of easy monetary policy of the leading central banks in order to reduce the risks of the UK leaving the EU. Consequently, real ‘duration chase’ broke out in the market, causing overall considerable price increase.

According to the results of the month, all bond funds managed by ABLV Asset Management demonstrated positive return from 1% to 2%, except ABLV European Corporate EUR Bond Fund, which did not manage to compensate the losses caused by the panic after the UK referendum (-0.2% in June) till the end of the month, since the drop during two days following the announcement of results was too heavy.

In the short term, we continue keeping to the defence strategy. Relatively high portion of cash is retained in all stock funds, since in the given situation, when no one is able to properly assess the occurring risks, high volatility might be preserved at capital markets. The decision on restoring the positions will be made after some certainty in market trends appears.

In bond funds, taking into account the market moods, the total duration of portfolios has been increased, since the developments on global bond market provide strong support to the markets of corporate bonds and the bonds of emerging countries. The overall outlook for these markets remains positive. Despite declining yields and narrowing spreads, the bond prices and return to maturity remain rather attractive for long-term and mid-term investments.

Mutual funds’ return as at 30.06.2016:

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”.