OREANDA-NEWS. February 14, 2013. In January, most financial markets were elated. The surge of optimism and consequent high demand for risky assets was due to partly solving the “fiscal cliff” problem. In early January, the US president Barack Obama approved the law supposed to alleviate the “fiscal cliff” impact on the economy, reported the press-centre of ABLV.

However, this has immediately evoked the question about increasing the public debt ceiling, since the debt is nearing the ceiling approved earlier – USD16.4 trillion, but parliamentarians rather quickly agreed to postpone this issue for several months. Another important event in January was the decision made by the Bank of Japan to join the central banks that “print without limitation”, which led to strong growth in the Japanese stock market.

This being the case, one as if should be happy and enjoy overall growth of stock indexes. But we are a little concerned about the phrase “currency war” being mentioned increasingly often. The actions taken by the Bank of Japan, causing the yen rate against all major currencies to drop by 20-25% over a few months, were much disliked by representatives of many countries. In Germany, speaker of chancellor’s Angela Merkel ruling party noted that such actions by Japan may provoke reaction of G20 countries. A similar statement was made by the First Deputy Chairman of the Bank of Russia Alexey Ulyukaev: “Japan is weakening its currency, and other countries may follow this example.” Thai Finance Minister said that the baht exchange rate cannot be considered “good”, and his colleague from South Korea expressed a wish to have the issue of monetary easing, performed in the USA, Europe, and Japan, discussed at G20 summit in Moscow at the end of February. And so on and so forth.

It is clear that most of those statements are emotionally induced and are rather a “verbal” intervention. However, it is possible that monetary authorities of some countries actually take more serious measures, like Brazil, which used severe interventions to make the rate of the real drop against the US dollar by 30% just over a year.

In the current situation, manager of the stock funds continued taking measures to reduce the share of some particular positions which in our opinion are associated with high currency risk. Although overall market outlook remains moderately positive, unpredictable exchange rate movements can cause the growth of some country’s stock market to be offset by exchange losses. A vivid example of this is ETF yield at the MSCI Japanese index. During the year, given the Japanese index Nikkei 225 growing by 26.5%, Japanese ETF (EWJ US) traded in the US stock exchanges has increased just by 3.3%. Therefore, currently most attention is paid to ensuring structure of the funds’ portfolios which would allow minimizing potential currency risks as much as possible, if situation on the “currency front” becomes worse.

In the emerging bond market, unlike previous months, the situation was controversial. Almost during the whole last year, the market was dominated by “hurrying” attitudes: everything was purchased at any price. At the beginning of the year, the trend seemed to continue, but the situation has changed dramatically during the very first week. Whereas corporate bond market maintained growth by inertia due to overall optimism, the market of government bonds experienced a rather strong correction. The major reason for the decline was the drop in prices of the US debt instruments, given increased demand for more risky assets, which put heavy pressure on bonds of countries having high investment rating.

Taking into account overall situation in stock markets, we expected such developments in the bond markets in the short term, therefore fund manager refrained from making new purchases, and one the contrary – increased the share of cash in the funds’ structure, taking profit under particular positions. Sold were mostly the bonds having high rating and long time to maturity. Such tactics led to value of ABLV Emerging Markets USD Bond Fund share decreasing just by 0.2% over the month. (EMBI Global Diversified index, which represents the total return of sovereign and quasi-sovereign debt instruments of emerging countries denominated in the US dollars, has declined by 1.44% over the month).

In the short term, we plan to restore the positions closed earlier, using the current correction.