Market situation in March
What happened in the financial markets?
Since the beginning of the month, the stock and bond/government securities markets have reported moderate declines. Undoubtedly, the main catalyst for this is the hostilities in the Middle East - the attacks on Iran by the US and Israel. In itself, the military conflict does not significantly affect the markets, Iran is not a significant part of the world economy and trade. There are two factors for the behavior of the capital markets:
• The serious difficulty of moving ships through the Strait of Hormuz, passing by the territory of Iran. This is an important trade corridor through which a large volume of goods and raw materials pass daily.
• Attacks by Iran on its neighboring countries supporting the US-Israeli coalition. Such countries are Saudi Arabia, the UAE, Qatar and others. Iran is shelling their oil refining facilities.
The concerns are that in the event of a prolonged conflict, the world economy will experience weaker than previously expected global growth and that inflation will be higher than forecast due to rising energy prices.
At the moment, there is no clear clarity on when this military conflict will end, but despite concerns, the world economy has useful moves to significantly limit the negative effects.
For example, last week the International Energy Agency (IEA), which holds 1.8 billion barrels of oil, voted to release 400 million barrels to reduce the effect of the war. 1.8 billion barrels of oil is equivalent to 124 days, or 4 months, of world oil consumption. Also, Donald Trump temporarily eased sanctions on trade in Russian oil, to which Russia responded with readiness to start selling Russian oil.
In short, despite the serious situation in the Middle East, the world economy has enough mechanisms to largely mitigate the effects.
What were our actions as a fund manager?
Regarding the bond/government securities market. DSK Standard and and DSK Euro Active hold in their portfolios mainly government securities denominated in euro with an investment credit rating. In this way, currency and practical credit risk are avoided. Regarding interest rate risk - the risk that the prices of the bonds held will decline in the event of a change in interest rates, both funds have a low total duration of their portfolios. Thus, they are much less negatively affected by an increase in interest rates. The further away a bond's maturity is in time, the more its current price is affected by changes in current and expected interest rates.
Regarding the stock market. In recent months, funds investing in stocks have made two important changes that have a positive impact on their performance compared to the leading global indices:
• They increased their positions in cash and cash equivalents;
• Funds investing in foreign stocks have increased their positions in commodities, the asset that is currently experiencing growth.
These actions provide the following benefits:
• Lower volatility – a smaller percentage of assets is invested in stocks than we hold during periods of calm market movement
• The greater value of cash in the funds allows, when markets calm down, to purchase undervalued stocks that lost some of their value during the war in the Middle East
• The increase in the value of our investments in commodities further helps the performance of our funds.
What steps can investors take?
With a high level of uncertainty and significant daily fluctuations in the value of financial instruments, investors should not react thoughtlessly and not succumb to emotional decisions. A sober assessment of their current need for free funds and a focus on the longer-term goals of their investments should be the basis of investment decisions. Liquidation of investments in such a market situation may lead to a negative result and limit the possibility of recovering the value of investments when the markets normalize and calm down.
Investing in investment fund units is associated with certain risks, such as market credit, liquidity, interest rate, operational risk, etc. A detailed description of the risks is presented in the “Risk Profile and Risk Factors” Section of the Funds’ Prospectuses and investors should familiarize themselves with them before making an investment decision.
This announcement is for informational purposes only and does not constitute investment advice, advice, investment recommendation or investment research. The value of the units and the income from them may decrease, profit is not guaranteed and investors bear the risk of not recovering their investment in full. Please familiarize yourself with the Prospectus and the Key Information Document before making a final investment decision. The documents are in Bulgarian and are available on the website of the Management Company "DSK Asset Management" AD www.dskam.bg, and upon request they can be obtained free of charge in hard copy at the office of the Management Company or at the offices of “DSK Bank” AD, designated as a distribution point, every business day during their working hours. Investors can obtain a summary of their rights in Bulgarian at the following hyperlink: https://dskam.bg/docs/librariesprovider3/dskam/documents/unitholders-rights.pdf