In August, the relatively peaceful moods that were observed on the global stock market over this year were interrupted by rapid escalation of geopolitical tension. For the entire month, headlines of the global mass media were all about the nuclear programme of North Korea, which is massively increasing its military capacity despite the international moratorium and sanctions.

Leaders of the US and DPRK were exchanging threats about the possibilities of using military force almost every day, which was leading to periodically occurring tension on the global financial markets. Even though these threats still remain only in words and not in deeds and there seem to be no actual reasons for concerns, still the investors are reacting more sensitively on the geopolitical news, which lead to American stock volatility index VIX, often called the fear index shifting from its long-year minimum and within a month reaching its peak value since the beginning of this year. So, it looks like the tension on the financial market starts growing.

Apart from the geopolitical news, one of the key roles on the stock market was played by exchange rates. EUR continued its growth, reaching peak value against USD for the last two years. With this background, European exporters were still under pressure. Euro Stoxx 600 again was demonstrating underperformance, dropping by 1% per month, whereas US broad market index S&P 500 remained where it was. The general negative movement of USD rate against the majority of global currencies is mainly related to emerging data on inflation which stays below the target level and which is regularly being noted by the representatives of the FRS. This, in turn, may change the plans of the FRS regarding the schedule of increasing the key interest rate.

The emerging markets are still benefiting from the weakening USD. Apart from the growth of the very stock indexes due to improved macroeconomic statistics, additional profit in USD is gained through strengthening of local currencies. This month MSCI EM one more time turned out to be leader of growth demonstrating increase by 2%.

Corporate reports’ season is almost over, and even though performance in Q2 brought less positive surprises in comparison to Q1, it still was rather strong. In USA, almost 80% of companies were demonstrating profit above the expectations of the analysts, in Japan — almost 70%, and in Europe — almost 60%. General profit growth also remains high: +22% in Japan, +13% in Europe, and +9% in USA.

Given the increased volatility and more cautious attitude of the investors towards risks in August, defensive sectors were outperforming the market. In Europe, the best performance was demonstrated by utility and consumer staples’ companies. In USA, utility companies also were leaders of performance, along with healthcare sector companies. Moreover, given the geopolitical uncertainty, stocks of defence industry companies were gaining as well. Both in USA and in Europe, stocks of metals and mining sector companies were growing. In August, iron ore price continued to recover and it had positive impact on quotations of companies of this sector. Cyclical sectors like oil and gas, financial and consumer sectors were underperforming. In Europe, indexes with a significant share of British and Swiss companies were demonstrating underperformance due to drop of their currencies against EUR affecting the yield of these indexes, expressed in EUR.

Markets of corporate and emerging markets bonds in August were demonstrating very good resilience to external factors and a rather good performance, especially corporate and emerging markets government bonds. Improvement in macroeconomic indicators, strengthening of local currencies (which eases the external obligations burden), favourable events on commodities markets, especially metals market — those are the factors contributing to retained increased interest of investors in emerging markets bonds. Reserved narrative of the FRS representatives, helping to decrease the risk of severe tightening of monetary policy, also is a sign of positive impact on the moods of market participants, which contributes to ongoing growth of prices.

In August, the mutual funds under management of ABLV Asset Management demonstrated returns commensurate with market in general.

In the medium term, we are still taking moderately conservative attitude. Given the increased short-term risks on global financial markets, a rather big share of cash remains both in bond and stock mutual funds. In bond funds, a significant part of assets is invested in medium term securities enabling to decrease volatility in case of negative events on interest rates’ market. Further decisions will be made depending on the development of situation on the financial markets.

ABLV mutual funds’ return as at 31.08.2017

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

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”.

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