Press release: Recent developments in financial markets and implications on KPST’s performance
On Monday, 12th of February 2018, the KPST’s Governing Board held an emergency meeting to assess recent developments in financial markets as well as short-term expectations.
How much did global financial markets tumble lower?
After the 2007-2008 crisis financial markets have enjoyed a long period of recovery with some short term stress periods along the way. In the face of this sustained appreciation of financial assets (bonds and equities) a correction was long overdue. This correction has just happened this year in late January – early February
In addition to the fall in global stocks of 8-10% since January 23rd 2018, investment grade bonds fell by 1% and high-yield (less qualitative) decreased by 3%. In such circumstances, all asset classes are having negative impact, with the exception of cash.
How has this reflected on KPSF’s performance?
Since 2011, and particularly during 2016 and 2017, the Board has increasingly allocated more assets in multi-asset and risk managed funds (47% in January 2018), in conjunction with Board’s objective to keep volatility at low levels, participate during uptrend markets and minimize the impact of downtrend markets..
The strategy proved to be rewarding in such abovementioned scenarios, with KPST unit price amortizing by -4.7%, or -2.7% from the beginning of the year. However, the performance for 1 year remains positive with +3%.
What is causing the falls?
Equity prices were steadily increasing over the years 2016-2017 and reached historic high prices
One can say that falls have resulted due to higher anticipated inflation rate in the US driven by low unemployment rates and increase of wage prices by 2.9%. The new fiscal package stimulus is expected to put pressure in the risk of rising inflation as well.
A significant increase in inflation would force the FED to accelerate the decision to increase the fed funds rate, which in the long-term would have an adverse impact on bond prices, whereas in the short-term would have an adverse impact on the stock market.
In addition, P/E ratios had reached record levels, and it was estimated that stocks (particularly those in the US) have become overvalued; therefore, the correction in the past 2 weeks, was not (after all) unexpected.
Are falls expected to continue?
The latest turmoil in financial markets is not to be compared with the 2008 financial crisis, since the banking system is liquid and big corporations are well balanced with strong balance sheets.
Much of the correction is believed to have already occurred, and while in the coming weeks there might be an additional small decline to close the correction, the performance is expected to stabilize and return to positive territory for the year.
These expectations are based on the fact that international institutions are emphasizing that developed economies are showing macro-economic stability.
What are the next steps?
The Investment Committee of the Board will meet next week as well in order to assess new incoming information, while the Investment and Risk Unit will continue to monitor market developments on daily basis.
Regarding strategic investments allocations, KPST is currently invested in: 47% in multi-asset funds; b) 33% in equities (10% in risk-managed equities); c) 11% in bonds’ and d) 9% in cash and money market instruments.
The Board believes that the current positioning of KPST (23% in directional equities and 77% in less risky and more protective instruments) is appropriate to navigate successfully and with prudence towards positive returns for the year.
Prishtina, Feb 13th 2018