In February, optimism continued to prevail on global stock market. As before, the US capital market indexes set the tone for positive moods, achieving new records day after day. It should be noted that investors had enough reasons for such optimism, since earnings season turned out to be rather good. As at the end of February, reports were published by approximately 90% of the companies, and 74% of those managed to surpass the analysts’ profit estimates, as the overall profit growth constituted 5%.

One of the few sectors that were not quite pleasant for investors was the telecommunications sector, in which corporate earnings appeared to be below the expectations, causing considerable stock price decline in this sector. Oil and metals and mining sectors underperformed the market as well, as those seemed to have taken a timeout after the rapid growth in previous months. On the other hand, companies of pharmaceutical and healthcare sector demonstrated decent increase. Those companies published quite good financial statements (9 out of 10 companies surpassed the analysts’ expectations regarding quarterly profits), accompanied by the diminishing importance of the concerns about possible drug pricing investigation, which made pressure on these sectors before.

In general, the situation was quite comfortable for the market, allowing S&P500 index to grow by 3.7% over the month. Whereas Dow Jones Industrials index has grown by 4.8%. Most likely, ‘Industrials’ was the operative word here. The expectations regarding promises made by Donald Trump about large-scale infrastructure rebuilding plan, increasing military spending, lowering corporate taxes, etc., which are supposed to result into American economic miracle, still provide strong support to the market, and therefore it is no surprise that the stocks of the companies involved in infrastructure and military government contracts became the growth leaders.

Meanwhile, interest rate increase expectations continue boosting the growth of financial sector stocks. Although in the speech given to Congress Donald Trump did not mention particular time when the miracles are to come, the proposed military spending increase by 84 billion (while the amount of 54 billion was announced earlier) and infrastructure rebuilding programme worth USD 1 trillion brought for approval provided new impetus for financial markets. Tax reduction issue remains not quite clear, but investors have preferred to ignore this so far.

European capital market was growing as well, although broad index of European companies STOXX Europe 600 demonstrated results that were more modest in general, rising by 2.8% over the month. Although the picture looked quite good at corporate level (income growth amounted to 11%), first, the investors’ expectations about Europe are slightly higher, and second, as elections in France and Italy are approaching, the political background constitutes a restraining factor. At the sector level, the situation was very similar to that on American market, except the financial sector, which was lagging behind given the declining yields of European government bonds.

Emerging markets continue demonstrating positive performance, and their composite index MSCI EM exceeded the US pre-election levels. In recent weeks, news background caused some weakening of the concerns regarding Trump’s aggressive policies in relation to the economies of emerging markets, especially that of China, and therefore MSCI EM index grew by 3% over the month and is still outperforming the global stock index year to date (8.4% against 4.9%).

At the global bond market, rather positive moods prevailed in February as well. Government bonds of developed markets were still undergoing consolidation, following rapid yield growth at the end of 2016, and overall risk-favouring attitude contributed to further narrowing of spreads at the corporate bond market and emerging bond market. The demand for high-yield bonds was especially high, and those outperformed the investment-grade segment once again, since the expected US interest rate increase constituted a restraining factor for the latter. Investors gained higher income from emerging market government and corporate bonds. One of the reasons for this was the investor comeback to these markets after the sale at the end of 2016. The overall year-to-date inflow to the emerging market bond funds exceeded 11 billion, which is close to the amount withdrawn by investors at the end of last year, following the US election won by Donald Trump.

In the medium term, we take waiting attitude. The investors’ focus switched to the US FRS actions and prospective interest rate increase. There are no doubts about the rate increase, but the amount and terms are not yet known, and therefore our further steps will depend on the market developments. In the bond funds, considerable amount of assets is invested in medium-term securities, which we believe to be the most secured against higher price fluctuations during rate increases and to ensure rather attractive return at the same time.

Mutual funds’ return as at 28.02.2017:

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”.