In November, world financial markets experienced strong emotions as a result of the presidential elections in the US and the meeting of OPEC member states.

Donald Trump, the Republican candidate, won the US presidential election, despite the fact that before the election day, 8 November, the Democratic candidate Hillary Clinton was leading, according to forecasts. Taking into account the unexpected result of the referendum on Brexit, voting contrary to predictions becomes the trend of the year! Financial markets were shocked by Trump winning the election, and virtually all global stock markets opened in the red on 9 November. However, just like after the UK referendum in June, investors quickly switched from being bearish to bullish on stocks, which became cheaper. Despite the initial negative movements, the US stock market demonstrated significant growth later. Thus, the US capital market indexes - S&P 500 and Dow Jones Industrial Average - reached new absolute highs. Whereas the European stock market looked less convincing, ending the month without changes. Emerging market equities were the least successful: during the month, MSCI EM lost 4.7%.

Such movements can be attributed to the expected implementation of the election promises made by Donald Trump, namely introduction of protectionist measures to support the US manufacturers, corporate and individual tax cuts, as well as massive investments in the US infrastructure. Such set of fiscal economy stimulation measures (unlike monetary stimulation, i.e., pumping money into economy, employed in the US during last 8 years) mean higher inflation rate, higher yields, and stock growth in the US over time.

Unsurprisingly, the stocks of the companies involved in infrastructure – construction, industrial, mining sectors of economy – were among the growth leaders in the US market, along with the stocks of financial sector companies (higher interest rates positively affect the profitability of banks and other financial companies). Whereas the implementation of protectionist measures by Trump might have strong negative impact on the economies of emerging countries, primarily their national currencies.

At the very end of the month, OPEC member states, for the first time in last 8 years, agreed upon cutting oil production by 1.2 million barrels a day. This long-awaited decision boosted the oil price increase by 8% in one day, causing a rapid growth in equities of oil sector companies.

For the global bond market, November appeared to be complicated, also because of the US presidential election won by Donald Trump. First, following the election, the probability of the refinancing rate increase by the US FRS at the approaching meeting in December has increased, along with the growing probability of faster increase in future. This can be attributed to the inflation expectations under implementation of the fiscal policy announced by Trump. Thus, the FRS will have more grounds for resuming the US rate increase. Second, the government will have to provide funding for investments in the infrastructure, which may cause
larger offer of government bonds and result in the yield increase. The latter scenario seems to be partly implemented in November – yields have grown significantly, and the prices of 10-year US Treasuries and Bunds have dropped accordingly. This has produced adverse effect on the emerging bond market, mostly the long-term investment-grade government bonds, which are the most sensitive to changes in yields of US Treasuries and Bunds.

Emerging corporate bond market was much more stable than that of government bonds, primarily due to lower duration and higher coupon rate, and therefore the price decline in the sector of mid-term securities was smaller, compared to the long-term bonds.

In the short term, we keep waiting attitude, since both the FRS and ECB meetings will take place in December – the last ones this year. Moreover, financial markets seemed to overreact to Trump election initially. Actions of future president should support the election promises. Rather high cash portion is retained in the stock funds, and in the bond funds substantial part of the assets is invested in mid-term securities. Further actions will depend on future market developments.

Mutual funds’ return as at 30.11.2016:

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”.