In October, optimism was prevailing on global stock market. US market continued breaking records fuelled by good economic data reports and data on Q3 profits of US companies.

ISM Manufacturing index, that shows activity of US manufacturing and is one of the key indicators of US economy’s overall condition, has reached its peak value since 2004. Furthermore, preliminary GDP data show that US economy grew in Q3 by 3% exceeding expectations of economists. Another corporate reporting season that started in mid-October also is providing positive support to the market. Although the season is in its middle (data on Q3 profits were reported by about 40% of US and European companies), investors are already pleased by the results. Almost 80% of the US issuers and more than a half of European companies having released their reports demonstrate profit above expectations of the analysts. Moreover, the companies are also increasing their forecasts on future profits and sales fostering optimistic moods and having positive impact on stock market. Given this favourable background, it is no wonder that US Broad Market Index S&P 500 at the end of the month grew by more than 2% breaking its historical maximum record once again.

Most of October, European stock market was standing still. Investors were looking forward to ECB meeting where President of ECB Mario Draghi had promised to reveal more details about the future of quantitative easing programme in Eurozone. As reported earlier, in the beginning of summer Draghi shocked the global community of market players speaking in favour of upcoming termination of monetary stimulus programme which lead to sharp strengthening of EUR against majority of currencies and triggered correction on stock market. Therefore, as another ECB meeting was coming closer, many market players were taking waiting attitude in anticipation of Draghi’s announcement. As a result, ECB extended the QE programme for another 9 months yet cutting volumes of asset buyout by half compared to currently existing ones. The decision matched the estimates of analysts and gave a clear signal that any actions of ECB will be very gradual and therefore will not harm the stock market. With a sigh of relief, market players rushed to buy stocks of European companies enabling EURO STOXX 600 index to grow by 2.4% at the end of the month.

Given the weakening EUR, companies with high export revenue share outperformed the market thus German and French indexes became top gainers demonstrating growth by more than 3%. Only the Spain, specifically Catalonia, was the fly in the ointment with a new wave of their unremitting dispute about the independence of the region breaking out. During October, Catalans managed to hold an independence referendum which Spanish government declared unlawful, then make some unsuccessful attempts to discuss the procedure Catalonia’s secession, declare independence, and finally lose their autonomy as Spanish government dissolved Catalonian Parliament and took temporary control over the region. The political fuss, obviously, did not contribute to inflow of investors to local stock market, though despite seemingly high degree of seriousness of the situation, overall European stock market and currencies market reacted to the events quite calmly. Most likely, it can be explained by the understanding of that the very process is illegitimate and independence of Catalonia would create an unimaginable precedent for the European Union, therefore the chance of such outcome is deemed to be very low. And it led to Spanish stock market quickly regaining its losses and even demonstrating a small growth by the end of the month upon first signs of political stability.

In the atmosphere of continuing optimism on the stock market, a better performance was still demonstrated by cyclical sectors. In USA, top gainers were technology sector, banks (which grew given the growth of US Treasuries yields), home-builders, whose growth was triggered by the need for Americans to rebuild their homes after a list of hurricanes crossing the continent. Healthcare sector was underperforming due to failures of American pharmaceutical companies to implement new drugs, as well as due to weak sales of existing drugs and more pessimistic financial forecasts. The defensive sectors such as consumer staples, telecommunications and retail were also underperforming.

In Europe, thanks to currencies, export-oriented sectors were showing stronger positions, e.g., auto sector, technology, and industrials. Financial sector was also underperforming greatly due to the role of Catalonian referendum, since Spanish banks have big influence on these indexes. Telecommunication companies and healthcare sector were suffering losses (for the same reasons as in US), as well as mass media companies which disappointed investors by weak profit reports.

In October, stock funds under management of ABLV Asset Management showed returns commensurate with market in general. In the medium-term, we expect current trend to remain, therefore a low share of cash is retained in stock funds in anticipation of continuing moderate growth of stock indexes.

In the reporting period, the situation on the markets of corporate and emerging markets bonds was developing in a rather ambivalent way. When the corporate sector was feeling rather confident given the overall optimism on stock markets and thanks to good micro and macro level statistics, the US Treasuries were demonstrating increased volatility. Emerging markets were mainly influenced by the movement of US Treasuries and Bunds. Strong macroeconomic reports in US intensified the inflation expectations triggering a wave of sales of long-term US Treasuries, which had negative impact on Investment Grade long-term bond segment.

In Europe, the constraining factor was the anticipation of ECB meeting mentioned above. Yet after the results of the meeting were announced, the market of bonds denominated in euros regained optimism fuelling growth of prices here. As a result, bond funds denominated in euros under management of ABLV Asset Management showed higher increase in value. In USD denominated bond funds, positive effect on the overall performance was ensured by High Yield segment, which was enjoying increased demand from the investors. Among the main reasons for such demand were the events unfolding on commodities markets, which demonstrate growth of oil and gas and metals prices being a favourable factor for the exporting countries.

In general, all bond funds under ABLV Asset Management demonstrated the increase of value of bond fund units by 0.2–0.9% this month.

In the medium term, we are still taking moderately conservative attitude. 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.  

ABLV mutual funds’ return as at 31.10.2017

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”.

Public information about the Funds is available on the Exchange Nasdaq Riga: www.nasdaqomxbaltic.com.

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