OREANDA-NEWS. In March, as well as in February, the global stock market showed the mixed dynamic. In the first half of the month, positive sentiment dominated on most of the major financial markets, and the stock indices dynamic of individual countries was determined mostly by internal factors. However, in the middle of the month the general central theme appeared - Cyprus, whose government was trying to avoid bankruptcy and interrupted operations of the country’s banking system for two weeks. The news from Cyprus caused a wave of anxiety and prompted most of investors to get rid of risky assets.

Who suffered most in this situation were the markets of Russia, Eastern Europe, as well as Spain and Italy, especially when it was revealed that Cyprus decided to rescue its banking system at the expense of investors, in fact taking a considerable part of their money, rather than at its own expense, as it had happened in the eurozone to date (when the authorities of individual countries were responsible for the banks’ losses in fact). This “peculiar” solution of the problem raised an important question: was that a precedent or an exception to the rule? Investors became especially excited after the Eurogroup head Jeroen Dijsselbloem said that the Cyprus rescue was a “template” for further rescues in the banking sector in the eurozone. Although this statement was refuted in a few hours, this failed to calm down most of the investors, the result being that almost all stock markets followed the downward trend. Very nearly the only market where the upward trend continued was the United States, which was mostly due to the continuing influx of money to that stock market.

ETF funds manager acted in accordance with the previously developed strategy “accumulate on the decline”; as a result most of previously closed positions were restored. The overall view of the market continues to be moderately positive, although we do not rule out some increased volatility due to the start of the next corporate reporting season, the results of which may clarify further medium-term dynamic of the stock market. At the moment, the main strategy is to “hold”, with possible tactical actions aimed at adjusting the structure of the funds’ portfolios.

On the bond markets of developing countries, a number of common factors may be identified that determined the market dynamic in March. In the first half of the month, the government sector of the market was under the pressure of US debt yield growth. Good data on the US labour market published in early March, together with the statements of the Federal Reserve officials that they did not plan to reduce the program of quantitative easing in the near future, increased the optimism on the stock markets and spurred the growing yield of US “long” bonds. That, in turn, contributed to the decline in prices of bonds with investment grades. However, from the middle of the month on, the behaviour of the bond market of developing countries was determined by the news background from Cyprus. Investors followed closely the negotiations between the Government of Cyprus and the “troika”, resulting in the agreement on allocating financial aid to Cyprus to the amount of EUR 10 bln in exchange for restructuring of the two largest banks of the country. As a result of such restructuring, Cyprus plans to collect (i.e. to take from depositors) EUR 5.8 bln. The main negative consequence for the government bond market was that the Cypriot scenario might be transferred to other troubled eurozone countries (Spain, Italy). As a result, in the second half of the month the profitability of the basic range of bonds of developing countries increased due to the higher risk premium against US debt securities. The main “blow”, similar to the stock market, fell on the bonds of such countries as Russia, Croatia, Hungary, and

Slovenia. Bonds of other countries have also been under selling pressure, although not as strong. We should also note high price volatility of Venezuela’s bonds caused by electoral struggle for power after the death of Hugo Chavez, and lower prices of Argentina’s bonds due to the ongoing uncertainty in relation to the country’s litigation against US hedge funds.

CIS corporate bonds experienced pressure due to events in Cyprus, because the issuing companies used financial counterparties in Cyprus in their operations. The largest drop in prices was shown by bonds of banks with subsidiaries in Cyprus, as well as by traditionally volatile bonds of companies of the metallurgical sector. Bonds with a high coupon yield and a relatively short period to maturity looked stronger than others. Due to a significant proportion of such bonds in the portfolio, the corporate bonds fund managed to avoid a negative result for the month, despite the overall negative trend of the market.

It should be noted that, considering the general situation on the financial markets, we expected some decline in the bond markets in the short term, and therefore, the cash was the large part in the funds structure.

At the moment, in our opinion, the decision on Cyprus should take the pressure off the European financial venues in the medium term. In addition, the previous statement of Ben Bernanke that the US Federal Reserve will continue to maintain its low-interest-rate policy for a long time, in our view, limits the potential for further reduction in bonds prices. Therefore, the current correction on prices and increasing spreads across nearly the entire bond market of developing countries will be used to reduce the cash component in the funds structure when the attractive levels of profitability, in our opinion, are achieved.