September turned out to be rather complicated month for global financial markets. Following the quiet conditions in August, volatility at the markets was resumed due to actions taken by the central banks of the leading countries. First was the ECB session at the beginning of the month, which was expected by some market players to bring additional stimulation measures under the ECB monetary policy.

However, this session of the European regulatory authority has not introduced anything new to the existing programme, and regarding future prospects various options were said to be under consideration currently, not mentioning anything specific, as well as the head of the ECB M. Draghi noted that extension of the asset buyout programme is not considered by the ECB at the time being. Such developments negatively affected the moods of investors, causing quite sharp correction on both stock and bond markets. Major indexes of the stocks of European countries dropped by 4–5% on average, and the US stock index S&P 500 lost almost 3%, paralleled by approximately the same decline sustained by MSCI EM.

Later, the investors focused on the sessions of the Bank of Japan and the US FRS, which took place in the middle of the month, virtually on the same day. Japan was the one giving a pleasant surprise to the markets by introducing another innovation to its monetary policy – the Bank of Japan announced that less attention would be paid to quantitative characteristics of the monetary programme in future, but more targeted control over the bond yield curve would be ensured, as well as restated the firm commitment to increase the inflation in the country. This decision rapidly improved the moods of market players, since the main conclusion was the one about yield of the long-term bonds of developed countries (mostly 10-year ones) to remain at current level, within a narrow range, for a long time. Moreover, the FRS postponed rate increase once again. The FRS giving no signs of aggressive tightening of the monetary policy, while the Bank of Japan and the ECB clearly pointed to retaining the easing policy, caused another decline in yields of the US and German government bonds, whereas taking into account very high correlation between the yield of US treasuries and S&P500 index recently, buyers returned to the securities markets, and therefore by the end of September major indexes managed to compensate virtually all losses sustained in the first half of the month.

Additional support to the market was ensured by rather unexpected statement by the OPEC about the intention to reduce the production quotas, resulting in a rally on oil market and the consequent increase in stock quotations of the oil sector companies and the mineral mining and processing sector in general. Technology sector in the USA and Europe demonstrated good dynamics as well, mostly due to the statement made by Apple regarding new iPhone model pre-orders surpassing previous records, which caused rapid growth of the company stocks (more than 10% over a week) and the whole sector.

Stocks of banking sector, primarily in Europe, demonstrated lagging dynamics once again. The key event there was the decision of the US Department of Justice to impose a fine of USD 14 billion to Deutsche Bank for mis-selling mortgage-backed securities, which had been said to be secure instruments but defaulted after the crisis in 2008. Although lower amount of possible fine (USD 4–6 billion) was mentioned later, highly negative impact has been produced on both the stocks of Deutsche Bank, which fell by 12%, and the European banking sector in general.

Taking advantage of stock index decrease, several purchases in particular sectors were performed in stock funds managed by ABLV Asset Management, as well as the portion of emerging countries was increased, since those demonstrate better performance than developed markets and are believed by us to have higher growth potential in the medium term.

The developments in emerging and corporate bond markets were similar – sharp correction at the first half of the month and a price rebound by the end of September. These markets were mostly affected by the same factors as the financial world in general. Since there has been no correction in emerging and corporate bond markets for more than six months, any cause would suffice to signal taking the profits. The results of the ECB session served as such cause. However, in our previous comments, we repeatedly noted that those markets remained very strong, which has been also evidenced by further developments. By the end of the month, all bond funds denominated in USD demonstrated positive returns. Performance of the European corporate bond fund denominated in euros was negative because of the overall nervous situation concerning Deutsche Bank, which precluded the market from compensating the losses sustained in the first half of the month.

In the short term, we expect further consolidation in emerging and corporate bond markets. Currently, the main reason hampering further price increase is the vast amount of new issues at the level of both corporations and countries. The issuers and investors alike are gaining more confidence about rate increase by the FRS this year, and therefore the former hurry to perform offering at lower rates, and the latter reduced their activity on secondary market, since under initial offering the issuers tend to provide premium on market yield. Therefore, primary market is the most active for the time being. Nevertheless, our opinion on these markets remains positive in the medium and long term, since despite declining yields and narrowing spreads, the bond prices and yield to maturity remain rather attractive for long-term and mid-term investments. Possible rate increase by the FRS has already been taken into account by the market, thus we do not expect the FRS actions to have sharp negative effect.

Mutual funds’ return as at 30.09.2016:

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”.