Management company comment about ABLV open-end mutual funds in July

Riga, Latvia, August 5, 2016, 17:25 / Investments

In July, the prices on global financial markets kept growing for almost all types of assets. The panic of June due to the unexpected results of the referendum concerning the membership of Great Britain in the European Union subsided rather quickly, and investors returned to the market. It can be partly explained by common understanding that the process of Great Britain leaving the EU will be quite long, thus preventing strong negative consequences. The statements of central banks, especially the ECB and Bank of England, regarding their readiness to provide support to financial markets and defuse the effect caused by Brexit, if necessary, played their role as well.

The beginning of the season of corporate reports was another factor that supported markets. At the moment, the results on their profit disclosed around 70% of S&P 500 companies, and in 80% of the cases analytics’ expectations were exceeded. Although the profit in Q2 fell by 4% in general (there was no increase even excluding the energy sector), it was enough for supporting the American stock market. As to Euro Stoxx 600 companies, the results published around 65% of them, and in 60% of the cases analytics’ expectations were exceeded. Here one could observe a drop in profit as well, which was 1% at the end of the quarter.

Satisfactory corporate reports contributed to the notable increase of American and European stock indexes at the end of the month. Euro Stoxx 50 increased by 4.4%, while the German DAX and the US S&P 500 demonstrated an increase of 6.8% and 3.6% respectively. As in Europe, in the US the energy sector turned out to be the only one performing worse than the market due to a drop in prices for “black gold”. The consumer staples sector (groceries and household products) was falling behind as well, which can be explained by the fact that the sector is traditionally considered “defensive”; therefore, taking into account outperformance demonstrated in the previous month, it was at the consolidation stage in July. The sectors of technology, metals and mining and US biotechnology companies showed the best results.

Although the European indexes showed positive growth at the end of the month, they are still significantly falling behind the US and emerging markets in year to date terms. While S&P 500 renewed its historical maximum, the European markets just reached their levels of the second half of June (before the British referendum) and still remain far from their maximums of the previous year. Such a delay can be explained by the investors’ current more careful attitude towards European stock markets, as new terms contributed to political uncertainty and ambiguity regarding economic growth in the euro area. Bearing the above-mentioned in mind, investors rather prefer stock markets of the US and emerging economies, which stay almost uninfluenced by the events in Europe.

Corporate bond markets and bond markets of emerging countries stayed very strong in July and kept demonstrating upward trends mainly ignoring negative news. Even a drop of 15% in oil prices, which a year ago would have caused panic on the bond market of emerging countries, passed almost unnoticed by investors. Prolonged ultra-soft monetary policy of the leading

central banks and a global drop in yields of government bonds of developed economies facilitate a massive inflow of funds to all bond markets. Investors are still “hunting for return and duration”, which further inflates bond prices of almost all issuers, even of those which were predicted to enter the stage of default a year ago. In this situation, High Yield sector showed the best trends: as on the bond market of European and US companies, as on the bond market of emerging economies.

Bonds of Turkey and Turkish corporations must be analysed separately, as they fell by 5–8% during a couple of days due to the unsuccessful coup attempt and emerged worries regarding further worsening of the investment environment in the country. Rating agencies added fuel to the fire by simultaneously changing rating outlooks for Turkey to negative ones, upon which Turkey turned out to be at the threshold of losing its Investment Grade status. However, there was good demand for fallen bonds of Turkish issuers on the following days, which allowed the bonds to compensate the losses on a large scale. Investors could not ignore good quarter reports of Turkish issuing companies for a long time, as well as rather strong financial metrics allowing to survive short-term political turbulence.

In the result of generally positive mood on global financial markets, all bond funds managed by ABLV Asset Management demonstrated positive returns.

In the short term, we continue sticking to the defense strategy. Relatively high portion of cash is retained in all stock funds, since fast and strong increase of stock indexes was followed by a correction of risk, and the overall situation on the micro-level does not impress neither in the US, nor in Europe.

Price consolidation on the attained levels is expected on corporate bond markets and bond markets of emerging countries, upon a strong increase demonstrated during seven months of the current year and due to the persisting negative oil trend. The overall outlook for these markets remains positive as spreads and yields remain rather attractive for long-term and mid-term investments.

Mutual funds’ return as at 31.07.2016:

the beginning
of 2016 (YTD)
20151 2014 2013 2012 Annualised
return since
the inception
Government Bond Funds            
ABLV Emerging Markets USD Bond Fund 9.14% 2.05% 2.75% -3.94% 15.63% 5.32%
ABLV Emerging Markets EUR Bond Fund 7.51% 2.31% 1.83% 0.92% 15.88% 4.37%
Corporate Bond Funds            
ABLV High Yield CIS USD Bond Fund 8.13% 25.30% -16.58% 2.20% 17.96% 5.53%
ABLV High Yield CIS RUB Bond Fund 8.40% 13.78% -10.21% 7.00% - 5.29%
ABLV Global Corporate USD Bond Fund 9.08% -1.58% 0.34% - - 3.03%
ABLV European Corporate
EUR Bond Fund
6.50% 1.47% 3.30% - - 4.74%
ABLV Emerging Markets Corporate
USD Bond Fund
8.41% 0.09% - - - 9.92%
Total Return Funds            
ABLV Multi-Asset Total Return USD Fund 2.98% -7.07% - - - -2.98%
Stock Funds            
ABLV Global USD Stock Index Fund -6.28% -6.78% -0.26% 10.24% 9.33% 0.14%
ABLV Global EUR Stock Index Fund -10.46% 0.86% 3.84% 3.26% 11.67% -1.65%
ABLV US Industry USD Equity Fund -2.64% -1.03% 6.95% - - 2.34%
ABLV European Industry EUR Equity Fund -8.04% 5.21% 2.09% - - -0.21%

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”.