Management company comment about ABLV open-end mutual funds in May, 2017

Riga, Latvia, June 5, 2017, 14:26 / Investments

The traditional saying “Sell in May and go away” did not quite work this year, and May has become another positive month for global stock markets. Moreover, the usual nervousness and increased volatility often observed in May were missing too. On the contrary, VIX index, which reflects stock market volatility expectations, fell down to the lowest point since 1993. News background was rather empty creating an impression of that the market was moving habitually slowly entering consolidation stage.

Decrease of volatility was without a doubt prompted by lowering of political risks in Europe. The second round of presidential elections in France ended up with a strong victory of pro-European candidate Emmanuel Macron. All pre-election polls were clearly predicting this outcome, so it was no surprise. Yet investors did not hurry to fix the profits and rather sticking to the principle “buy the rumour, sell the news” continued directing money to European stock market. In general, no sharp moves were present on the global stock market, and the results of this month show increase of Euro Stoxx 600 per 0.75%, US Broad Market Index S&P 500 grew by a little more than 1%.

Continuing gradual growth on the global stock markets was supported also by rather good earnings reportins. In May, almost all major companies have released their Q1 reports. Year on year profit growth constituted 23% in Europe, and 14% in US. In US almost 80% of reporting companies beat analysts’ expectations, while in Europe more than 60% of companies managed to exceed market estimates. Among industries, both in US and Europe shares of non-cyclical industries took the lead, for example, telecommunications, utility, healthcare companies. Apparently, the investors were choosing defensive positions given the the fact that the market has become notably more expensive. Thanks to the strong corporate earnings reports, technology sector significantly outperformed the market. While automotive industry turned out to be among the weakest sectors in Europe. Dieselgate has drawn attention to itself once again, this time Mercedes fell under scrutiny of government. This fact in combination with relatively low car and truck sales in US was pushing down stocks of car manufacturers. Both European and US metal and mining sector companies underperformed due to drop of iron ore prices caused by overcapacity in China, which the analysts though believe is temporary.

Positive moods continued to prevail on emerging stock markets (MSCI EM grew by 2.8% this month) despite the negative surprise in Brazil, where the corruption scandal blazed up again. This time it hit the current president Michel Temer, who has taken the office less than a year ago. An audio recording was leaked, on which Temer is presumably discussing bribes with the owners of meat giant JBS. On the following day after this information appeared, Brazilian market fell by almost 9%, while Brazilian real dropped by 7% against US dollar. Meanwhile, shares of the JBS lost 24% during May, whereas at one point it faced a daily drop of more than 30%. Investors were worrying about the probable impeachment of the president of Brazil, which could become another obstacle to continuing the economic reforms, which are already hardly moving forward. Yet the situation stabilized soon, and other markets avoided its negative influence.

Global bond market has been rather stable. At the May meeting, US FRS retained the base interest rate at 0.75–1% meeting the expectations of the market participants. However, the meeting notes showed that overall mood was hawkish — FED called the deceleration of US economy growth in Q1 temporary, regarding the inflation, it mentioned that the price growth pace has almost reached the long-term key level. In the opinion of FRS, US economy is going to continue moderate growth, thus clearing the way for two more increases of the base rate this year. It is highly likely that the first increase is going to happen in June, and the second one — in September/December. But while the market is sure about July’s increase, the chances of further tightening policy of FRS will to great extent depend on Trump’s reforms. Currently, despite the president’s optimism, the promised reforms are losing momentum — it is four months since Trump entered the office and not a single economic incentive has passed the Congress yet.

One of the most important topics for the market is discussions about FRS balance sheet shrinkage at the upcoming meetings, given that during the quantitative easing policy it reached USD 4.5 trillion and now is being maintained by the reinvestment of income. Lowering the amounts of reinvestment is going to lead to gradual shrinking of the balance sheet and accordingly lower liquidity, which may have negative impact on global financial markets.

These circumstances facilitated the stabilisation of yield on US Treasuries and German Bunds, which in turn had positive impact on the corporate and emerging markets bonds.

There was also an emotional outburst in response to political escalation in the White House in the middle of the month and added by the new round of corruption scandal in Brazil, however, the negative reaction of investors was short and markets stabilized soon. Even a significant increase in volatility on oil market related to the anticipations and results of the upcoming meeting of OPEC member-states and other oil manufacturers regarding extending the deal on cutting production did not have any serious impact on the emerging market bonds.

It resulted in mutual funds under management of ABLV Asset Management demonstrating positive return at month-end. The most solid growth was demonstrated by Emerging Markets Government Bonds and High Yield Corporate Bonds denominated both in US dollars and euros.
In the medium term, we take waiting attitude since much depends on the implementation of Trump’s financial incentives and dynamics of long-term US Treasuries.. In the bond funds, considerable amount of assets is invested in medium-term securities; a relatively small amount of funds is invested in stock. Further decisions will be made depending on the development of situation on the market.

ABLV mutual funds’ return as at 31.05.2017

the beginning
of 2017 (YTD)
2016 20151 2014 2013 Annualised
return since
the inception
Government Bond Funds            
ABLV Emerging Markets USD Bond Fund 5,45% 6,99% 2,05% 2,75% -3,94% 5,21%
ABLV Emerging Markets EUR Bond Fund 4,08% 8,96% 2,31% 1,83% 0,92% 4,56%
Corporate Bond Funds            
ABLV High Yield CIS USD Bond Fund 3,20% 10,36% 25,30% -16,58% 2,20% 5,60%
ABLV High Yield CIS RUB Bond Fund 4,09% 10,47% 13,78% -10,21% 7,00% 5,60%
ABLV Global Corporate USD Bond Fund 2,33% 9,32% -1,58% 0,34% - 3,04%
ABLV European Corporate EUR Bond Fund 1,07% 9,14% 1,47% 3,30% - 4,65%
ABLV Emerging Markets Corporate USD Bond Fund 4,13% 10,23% 0,09% - - 8,53%
Total Return Funds            
ABLV Multi-Asset Total Return USD Fund 5,03% 3,80% -7,07% - - 0,57%
Stock Funds            
ABLV Global USD Stock Index Fund 7,57% -5,24% -6,78% -0,26% 10,24% 0,97%
ABLV Global EUR Stock Index Fund 7,60% -4,40% 0,86% 3,84% 3,26% -0,11%
ABLV US Industry USD Equity Fund 3,97% -0,27% -1,03% 6,95% - 3,60%
ABLV European Industry EUR Equity Fund 7,52% -2,78% 5,21% 2,09% - 3,48%

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

General information on ABLV mutual funds and management company ABLV Asset Management, IPAS, as well as all additional information can be found on ABLV Bank home page in the section “ABLV Mutual Funds”.

Public information about the Funds is available on the Exchange Nasdaq Riga:

This comment is intended exclusively for informative purposes and cannot be considered as an investment recommendation or advice.