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

Riga, Latvia, January 6, 2017, 18:23 / Investments

In December, global equity market kept the positive mood set in November following the US presidential election won by Donald Trump. After things calmed down, forthcoming meeting of central banks – the European Central Bank and the US FRS – came to the foreground.

As expected by most analysts, the ECB prolonged the asset purchase programme by 9 months (to December 2017), however, reducing its amount to EUR 60 billion per month (from EUR 80 billion currently). In his statement, the head of the ECB Mario Draghi did not focus on cutting the programme but stressed the ECB readiness to keep sufficient monetary support to the markets and economy instead. Also, necessary changes were made to address the market shortage of securities bought by the ECB under the programme. The decisions were not surprising, and those have not changed the fundamental outlook on the ECB monetary policy, boosting further growth of European stock market, which were clearly lagging behind the US market in previous month. Decline of the euro rate was beneficial for the market, especially for the car manufacturing sector. Whereas growing yields of the developed countries government bonds aroused high investors’ interest in the banking sector. Consequently, EuroStoxx 50 index grew by 7.8% over the month.

The FRS meeting, at which key interest rate was increased by 25 basis points, constituted no surprise either. However, statements made by the chair of Federal Reserve Janet Yellen were tougher. She mentioned improvements in the labour market and more optimistic unemployment forecasts, which made the market players review their expectations on the interest rate for the end of 2017, thus causing another increase of the dollar rate against most currencies of the world. Perhaps, in other circumstances this might lead to a correction in stock markets, but growing prosperity of the US economy promised by Donald Trump aroused such euphoria that the investors ignored the results of the FRS meeting. Although growth pace of the US capital market has declined compared with the previous month, it has reached another historic maximum. Financial sector was outperforming once again (given the interest rate increase, since it is a positive factor for the profits of financial companies), also oil and gas sector was among leaders, which was growing against the backdrop of increase in oil price (note that OPEC countries agreed on reducing production quotas at the end of November). And even such defensive sectors as telecommunications and utilities outperformed the market, even though interest rate increase usually negatively effects the respective stock indexes. Most probably, this is due to lagging behind previously. Pharmaceutical sector underperformed the market, given the resurged threat of drug pricing investigation. This time the US new president Donald Trump set to address this matter.

Although the situation was generally favourable for the global stock market, emerging market equities were losing again. This market remains to be affected by concerns regarding possible negative impact of Trump’s policy on the economies of emerging countries and a drop in local currency rates against the US dollar, which negatively influences the overall value of respective ETFs.

In December, global bond market was in the consolidation stage, following the shocks in November. Although the results of the ECB and FRS meetings cannot be said to be positive, it seems the market losses in November could not be bigger. Therefore, even though the yields of US treasuries and bunds continued to increase at the beginning of the month, investors started returning to the corporate and emerging markets bonds. Several factors can be mentioned in this regard. First, growing capital markets increased the overall ‘appetite for risk’. Second, increasing oil price ensured significant support to the bonds of the countries exporting energy resources. Third, in November the securities of many issuers were oversold without any reasons, driven by emotions, and upon stabilization in the bond markets of emerging countries, many of the bonds regained their value. Such market situation boosted considerable spread decrease and price growth, especially in the corporate segment, both investment grade and high yield. The sector of emerging government bonds was lagging behind, but spread returned to pre-election levels there as well. Consequently, the value of shares of bond funds managed by ABLV Asset Management, IPAS grew by 0.8-1.4% in December.

In the midterm, we take waiting attitude. Macroeconomic statistical data of the US will be very important, and it will be possible to form a judgement on the economy and inflation based on those results. After all, last two months markets were mainly driven by pure expectations (based on promises). Therefore, first it is necessary to wait for the election promises of future US president to come true, and then it will be possible to assess the potential impact of these changes on the financial markets.

Mutual funds’ return as at 31.12.2016:

the beginning
of 2016 (YTD)
20151 2014 2013 2012 Annualised
return since
the inception
Government Bond Funds            
ABLV Emerging Markets USD Bond Fund 6,99% 2,05% 2,75% -3,94% 15,63% 4,87%
ABLV Emerging Markets EUR Bond Fund 8,96% 2,31% 1,83% 0,92% 15,88% 4,32%
Фонды корпоративных Corporate Bond Funds            
ABLV High Yield CIS USD Bond Fund 10,36% 25,30% -16,58% 2,20% 17,96% 5,50%
ABLV High Yield CIS RUB Bond Fund 10,47% 13,78% -10,21% 7,00% - 5,23%
ABLV Global Corporate USD Bond Fund 9,32% -1,58% 0,34% - - 2,73%
ABLV European Corporate EUR Bond Fund 9,14% 1,47% 3,30% - - 4,89%
ABLV Emerging Markets Corporate USD Bond Fund 10,23% 0,09% - - - 7,96%
Total Return Funds            
ABLV Multi-Asset Total Return USD Fund 3,80% -7,07% - - - -1,90%
Stock Funds            
ABLV Global USD Stock Index Fund -5,24% -6,78% -0,26% 10,24% 9,33% 0,25%
ABLV Global EUR Stock Index Fund -4,40% 0,86% 3,84% 3,26% 11,67% -0,89%
ABLV US Industry USD Equity Fund -0,27% -1,03% 6,95% - - 2,80%
ABLV European Industry EUR Equity Fund -2,78% 5,21% 2,09% - - 1,59%

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”.