OREANDA-NEWS. May 14, 2013. In April, after things in Cyprus have calmed down, major global stock markets resumed living their own lives, and dynamics of stock indexes of particular countries were mostly determined by internal factors.

At the beginning of the month, the US and Japanese markets looked much better than others due to continued growth, while European markets and largest emerging markets declined. The main reason for such diverse dynamics was macroeconomic statistical data that evidenced further divergence between trends in the European and the US economies. Given continued record growth of unemployment (12.1% in March) and recession in the euro zone, the US economy, according to preliminary data, in Q1 2013 demonstrated growth by 2.5% y/y, which is better than the average quarterly figures in 2012. Corporate reports for Q1 2013 released in April showed that the US situation is also much more positive on micro-level.

In Japan, the major growth factor still was constituted by the actions taken by monetary authorities. At the beginning of April, the Bank of Japan announced the monetary easing programme aimed at combating deflation and achieving inflation increase to 2% within the following two years. The major tool employed under this programme will be monetary base doubling till March 2015.

The markets of emerging countries, especially those exporting raw materials, were highly adversely affected by declining prices of almost all primary goods (Brent price decreased by more than 13%, that of cooper – by more than 10%, gold – 17%, silver – 20%).

However, in the second half of the month, the mood at stock markets, first of all at the European ones, has changed dramatically. Given distressing economic data, market players convinced themselves that support will be provided if situation becomes worse, and salvation shall be ensured by the ECB. Expectations of refinancing rate reduction appeared on the market, and owing to those most markets managed to compensate their losses sustained in the first half of April.

At the beginning of the month, given worsening macroeconomic data and fall in the raw material markets, the manager of the stock funds decided to reduce the share of stocks in the portfolios, firstly those of the European and emerging markets, expecting considerable corrections. Further developments showed that this decision was wrong, and therefore in the second half of the month, after market mood had changed dramatically, most portfolio positions were restored.

Currently, holding strategy is the main one for stock funds. Mid-term view of the stock market remains to be moderately positive, however we do not rule out the possibility of traditional volatility appearing in the summer.

Actions taken by the Japanese monetary authorities can be surely named the major factor
determining dynamics in bond markets of emerging countries. The statement made by new
governor of the Japanese central bank Haruhiko Kuroda regarding the monetary base doubling
from 140 trillion yen to 270 trillion yen was a real surprise for the market, since such actions appeared to be much more radical than expected. This caused rather sharp decline of return under the US government bonds, which in turn positively affected prices of the emerging countries government

bonds, especially those assigned investment grade. Consequently, the market recovered losses
of the whole first quarter during just 4 days. The actions taken by the Bank of Japan will lead to further weakening of the yen and declining return of the Japanese government bonds, which will make Japanese institutional investors to switch from the yen to other currencies and to buy bonds of other countries having higher return.

The market of the CIS states corporate bonds demonstrated lower return. The major impediment here was the flurry of new issues taking over the market. From the 10th of April till the end of the month, there was virtually no day without issue announced, and on some days even issues performed by several issuers took place. In total, there were new bonds worth 15 billion dollars issued in the market during 3 weeks, and this made certain pressure on prices of the bonds issued before.

We would like to remind that, given the overall situation in financial markets, a considerable share of the bond funds is constituted by the cash component. Taking advantage of declining prices of the investment grade bonds and expanding spreads during Q1, we increased the share of such bonds in the portfolios at the beginning of the month, and therefore were ‘fully armed’ when the decision of the Bank of Japan came, thus being able to participate in the rally.

Currently, holding strategy is the main one. Due to large inflow of cash at the end of April, the cash component of the funds is rather high, and the same will be used for purchasing the bonds we consider most attractive.