Beyond general information of the Funds, the portfolio reports offer a strategic overview on the latest performance.

The European debt crisis affecting the global economy, together with the series of measures recently taken in China aimed at preventing the overheating of its residential property market,may lie behind the unfavourable performance of equity markets in May. It is ironic that the drop in share prices has occurred precisely at a time of improving macroeconomic figures and favourable company reports. The MSCI World index decreased by 9.9% in May in US dollar terms, but scarcely changed in forint terms due to the favourable effects of the weakening forint.

On the first trading day in May, the S&P500 opened at 1189 points, before beginning a sharp correction and closing at 1089 on 28 May, a decline of exactly one hundred points, or 8.41%.

Although it is true that a drop in share prices of this magnitude in a capitalization-weighted index watched by professional investors will in itself not necessarily result in small investors selling their shares en masse, the hesitation of professional investors on the equity markets is nevertheless striking when one takes into account the oft-cited problems of national debt onthe global – and particularly European – level.

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With an error-correction model

In recent years the yields on 5-year Hungarian government bonds have fairly consistently followed the Itraxx Crossover index, which tracks the premiums on high-risk European corporate bonds. Meanwhile, yields on 10-year annual government securities have been conspicuously in step with the implied volatility calculated from options offered on the EUR/HUF exchange rate. The existence of a close relationship between these factors is also suggested by the high – over 0.9 – correlation coefficient. The empirical findings can be supported by economic theory: under the approach taken by conventional capital-market
models, the expected yield is function of the assumed risk. Due to the composition of its basket, the Itraxx Crossover can be regarded as a global barometer of our expectations with regard to the risk premium of instruments with a similar rating to that of Hungarian government securities. The implied volatility, deduced from the EUR/HUF exchange rate, is impacted by both the general perception of risk in the domestic market, and the global appetite for risk.

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