OTP Capital. View on the current events
Dear investors and depositors of investment and pension funds, which are in the management of OTP Capital. We continue to publish prompt messages regarding the current economic situation in the world and in Ukraine, as well as the status of assets held in the portfolios of investment and pension funds managed by OTP Capital.
What is happening in the world?
Global markets, following the announcement of the massive incentives we mentioned in the past commentary, are growing almost without stopping. In particular, the US stock indexes increased by 20% (Dow Jones) and 17% (S&P 500) in comparison to the March lowest values. The same pattern is in Europe – Germany: +19%, France: +19%, England: +13%. In this case, the share indices are quite indicative as they are considered to be the leading indicators, that is, the future profits of corporations, their growth, increase in sales, etc. are laid in the current share prices. All this is because the fiscal and monetary incentives allow accelerating the economic processes, to reduce the loan costs and stimulate the demand. Everyone are stimulating now, the virtually zero interest rates can now be seen from Australia to Canada, the same situation is with the tax incentives – the G20 countries have allocated 5 trillion US dollars through the fiscal policy. The entire world has entered the phase of aggressive struggle against the economic consequences of the coronavirus pandemic.
How does Ukraine reacts?
As noted in the previous comment, it is critically important for Ukraine to establish cooperation with the international financial partners in the current conditions. In order to resume crediting from the IMF, it was necessary to adopt two laws – on the opening of land market and on the non-return of banks to their former owners. Yesterday (March 30, 2020), at the extraordinary meeting of the Verkhovna Rada, the Law “On the Opening of Land Market” was voted, and the Law on “Non-Return of Banks to Former Owners” was adopted in the first reading. The next week, the voting on the law on banks of the second reading will take place. As we can see, the legislative initiatives allow the assistance of the IMF and other international partners. In addition to the financial stabilization, the cooperation with the IMF will help Ukraine become more attractive to the world in terms of investment, and as the situation stabilizes, in the context of a cheap mass of money abroad, the cash flows will flow into Ukraine.
Additional noteworthy positive factor is the replacement of a more “market” finance minister who is able to work with Western partners and has experience in dealing with public finances in a hard period for the country.
IMF assistance allows the additional monetary stimuli. In the conditions of stabilization of the financial situation of the economy of Ukraine, the National Bank may continue the policy of cheap money in order to reduce the cost of lending in order to revitalize the country’s economy, in particular, by further reduction of the discount rate. Reduction of the cost of financial resources in the country will also stimulate the reduction of the government bonds yields.
However, despite of the many positive trends in the country’s financial life, we continue to observe the volatility in the government bonds market. In particular, today (March 31, 2020) the fair value of government bonds published on the NBU website, which is used by OTP Capital within the framework of accounting policy to estimate the value of securities in funds, increased from 16 to 20%, which has significantly reduced the value of fund portfolios. By our assumption, the NBU’s calculation algorithm was guided by secondary market transactions with significant discounts. After all, the primary auctions are not currently taking place and the current “fair” government bonds yield is formed only at the expense of the secondary market. However, the transactions occurring in the secondary market are not indicative, as there are very large spreads (the difference between purchase and selling prices) currently. Many transactions in the market occur as repo transactions with discounts. Therefore, the valuation of yields in the funds’ portfolios do not reflect the real situation. In simple words, currently, it is impossible to purchase the government bonds with a yield of 20%.
In our opinion, the current level of government bonds yields is temporary and will be adjusted in the near future, which in turn will return the results of the funds to the usual high level.
