OREANDA-NEWS. April 14, 2014. March, unlike February, in global financial market appeared to be very uneasy. The escalation of crisis in Ukraine and growing tension around the Crimea, in particular, the announcement of Russia on readiness to ship the forces onto the territory of the neighboring country caused especially in the first days of the month panic sales of risky assets.

Following calls for economic sanctions against Russia only added some nervousness. As a consequence the majority of stock markets, first of all European ones, suffered heavy losses in the first half of the month.

However, after the referendum in Crimea and Crimea’s “peaceful” entry as constituent entity into Russia, the situation radically changed. When it became clear that so called “sanctions” were mostly limited by the blocking of correspondent accounts of one of Russian banks and the introduction of visa limitations in regards to several high-ranking Russian officials, market members got an impression that promises would not be realized. The more so, main calls were originated by the USA (that is far), while in Europe, that has closer economic ties with Russia, opinions were not so categorical. As a result, consumers returned to global stock market and the main European indices recovered mostly their losses. Even the RTS index lost 3,2% overall per month (in the first half of the month the loss reached 20%).

Outperformance was noticed in the stock market of emerging countries that seriously closed the gap between them and the world market due to appeared expectations regarding possible measures of stimulating the Chinese economy by the Chinese authorities.

In our previous reviews, considering the overall developments in the market since the beginning of the year and given the sharpening geopolitical situation we anticipated increased volatility in the short term. Therefore, the cash level in the stock markets was increased. In accordance with taken tactical decision earlier, the correction was used to restore parts of closed positions.

In short-term we anticipate the continuation of consolidation in stock markets, in expectation of the beginning of corporate reports’ period and the maintenance of certain geopolitical tension. We are going to use this situation to cut some funds in the funds portfolio, as our expectations in the middle term remain moderately positive.

The bond market of emerging countries, both corporate and state, surprisingly appeared to be sufficiently resistant towards geopolitical shock. The only market that suffered losses was the market of CIS, primarily Russia that in the first half of the month experienced a strong tendency of panic sales when fundamental factors gave place to geopolitics.

However, as in the stock markets, the introduction of limited sanctions concerning neither system forming enterprises nor some areas of economy resulted in a considerable growth of Russian Eurobonds at the end of the month. Nevertheless, in spite of the growth, Russian bonds could not completely recover losses of the first half of the month. At the same time, Ukrainian bonds not only reached the levels of the end of February, but they grew in price by 5% (long-term bonds).

This, in our opinion, clearly demonstrates the irrationality of markets, when fundamental factors became less important than emotions.

The global bond market showed, in general, a considerably good dynamics due to the return of investors’ interest to this type of assets. If last year we witnessed large cash outflow from bond markets and inflow to stock markets, then in the first quarter of the year there is a strong inflow both in bond and stock markets, on a 50-50 basis that determines the growth of both markets. The bonds denominated in euro continued to demonstrate price growth supported by the announcement of Mario Draghi on the ECB readiness to weaken the monetary policy, as the inflation in the eurozone is still far below the targeted level.

In spite of market stabilization, the fund managers continue to keep to moderately conservative strategy, preferring bonds with high coupon yield and relatively low duration due to US quantitative mitigation and an existing risk of interest increase in favorable macroeconomic circumstances. We also believe that Russian bonds in spite of the growth at the end of the month still remain heavily resold and remain attractive for long-term investments.