Volatility persists in the equity markets in general as the environment in which they are being traded remains very uncertain. We had mixed data issued during the past few months; however, economic growth rates are still looking very weak.
Profit warnings, disappointing sales figures and possible accounting irregularities in Europe, coming from the largest Dutch retailer Royal Ahold NV which fired its top executives after inflating profit, have been some of the main contributors to such volatility.
In addition to this, sentiment has abated in recent weeks owing to the Iraq crisis and the North Korea nuclear weapons issue. A study conducted by UBS AG and Gallup Organisation confirms this, since it showed that confidence among European investors fell to a low in February.
Among a declining appetite for risk from investors, increasing volatility, there is also a fear of long-term economic consequences which is weakening the demand for equity markets. The effect on the bonds is different, as uncertainties provided further support for bonds, which were able to fulfil their function as a safe haven.
In the international bond market we have been experiencing various rising trends such as those of Japan yields which fell to a record low, meaning Japan's bond prices rose, European bonds have continued with last year's upward trend and in the North American markets we have witnessed some price easing. However the 10-year US Treasuries which fluctuated around the 4% yield at the beginning of the year later fell to around 3.8% since demand for US Treasuries has gone up in speculation that the US will enter war with Iraq sooner or later.
The US, UK and Spain last week delivered a draft UN Security Council resolution stating that Iraq has lost its "final opportunity" to co-operate with weapons inspections mandated by a resolution passed in November.
In the emerging bond markets we have seen Brazil's bond prices increasing by around 20% since the election. After the first two months in Presidency Lula da Silva, Brazil's new President, kept his promises, thus gaining support from international investors.
He proposed to cut the budget's expenditure more than the IMF demanded and he is adopting an appropriate monetary policy to curb inflation. Under his administration the central bank of Brazil has already increased rates twice to curb inflation.
The Central and Eastern European bond markets experienced EU accession euphoria after the Copenhagen Summit which was accompanied by further capital inflows and stronger currencies. A case in point: foreigners boosted their holdings in Hungarian government securities by almost 50 per cent by the end of 2002.
Turkish debt jumped after Economy Minister Ali Babacan said the United States had offered $6 billion in grants, a total aid and loans package worth up to $30 billion in exchange for posting troops in the country. These gains were cancelled after the parliament rejected the proposal.
Russia's foreign exchange reserves have been on the increase and this further attracted foreign direct investment which has been the way forward to further reduce the risk premium and push up the bond prices.
Uncertainties such as geopolitical tensions have affected the world markets in some form or another. On one hand they have adversely affected the equity markets as it created volatility which made investors shy away from these markets. On the other increased uncertainties have positively affected investment grade bonds as equity investors have shifted to these markets.
With regard to the emerging bond markets, though they fall within the fixed income market, they are different since various other risks attributed to them are involved which sometimes detach themselves from global trends, however NATO member Turkey has been hit directly by the crisis in neighbouring Iraq.
Mark Azzopardi, MA Finance; B.Com, is investment and finance director of Jesmond Mizzi Financial Services Ltd. e-mail: mazzopardi@jmfs.net
The value of investments can go down as well as up. Past performance is no guarantee for future performance. This article does not intend to give investment advice and the contents therein should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation.