Experts seem to agree on the importance of staying calm during market volatility. Pic: Getty Images
News
Experts seem to agree investors should hold their nerve and brace for a wild ride amid the latest 2024 market volatility with fears the US could be heading for a recession and Japan’s central bank raising interest rates.
What has happened? It was only a few days ago that the S&P Dow Jones Indices (S&P DJI) monthly report hit my inbox saying Australia’s benchmark S&P/ASX 200 had its best month of the year in July, finishing up 4% to a new record high at 8,092.
US markets also mostly saw gains in July. The S&P 500 rose 1.13% in July, the Dow Jones Industrial Average increased 4.41%. The tech-heavy US Nasdaq Composite index fell 0.7% for the month as tech came under increasing pressure.
But all up, July wasn’t a bad month. And then the winds changed. In blew worse than expected US jobs data on Friday, prompting fears the world’s biggest economy wasn’t heading for a soft landing but rather a rough and tumble hard recession one.
Panic set in with fears of a US recession reverberating around global markets with heavy selloffs, while adding to the angst was a Bank of Japan (BoJ) rate rise.
After 17 years Japan’s central bank raised rates for the second time this year, up 0.25% from 0-0.1% and also announced plans to taper back its stimulus and bond buying.
The BoJ’s rate rise led to an unwinding of the Yen carry trade or buying Yen and selling US risky assets. While Aussie and Asian markets recouped some heavy losses on Tuesday trade, markets remain volatile.
The CBOE Volatility Index (VIX) – often referred to as Wall Street’s fear gauge – jumped by 65% to 38.57 on Monday. It was the VIX’s highest closing level since October 2020.
READ: Fear Index spikes to highest level since Covid, can ASX traders capitalise?
In some welcome news for local markets, though, on Tuesday the Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35%.
So, what are the experts saying is going on? Should investors be worried and where to from now?
Saxo Markets head of equity strategy Peter Garnry told Stockhead long-term investors should not overreact to recent volatility but instead assess whether their portfolio has the right level of diversification.
“While the last couple of trading sessions have been volatile and seen big declines, it is important to stay calm,” he says.
“If anything, the recent selloff will create a lot of interesting opportunities in equities.”
Garnry says markets will in the short term be very volatile and more technically driven than based on fundamentals, which is why long-term investors should avoid reacting too much.
“The worst mistake any investor can make today is drastically selling positions,” he says.
“Our view is that there is a 33% probability of a recession.”
He says there are still too many economic indicators that are not aligned with an incoming recession.
“The US economy is still growing around the 2% real GDP growth rate and Europe’s economic activity has recently improved a lot.
“If we are right, the setback in equities will prove to be an opportunity for long-term investors.”
Founder and CEO of global financial advisory company deVere Group Nigel Green told Stockhead as the US grapples with a potential recession and Japan faces a surging yen, Australia’s trade relationships and economic growth could face disruption.
“Monday’s 3% drop in the ASX/200 reflects growing investor anxiety about these global shifts,” he says.
Green says the strengthening yen makes Japanese goods more expensive, impacting Australia’s trade balance and leading to increased costs for consumers and businesses alike.
“Japan is a major trading partner for Australia, especially in sectors like agriculture, minerals, and energy,” he says.
“A stronger yen and Japan’s economic slowdown could lead to reduced demand for Australian exports, affecting national income and employment.
“As the yen appreciates, the Australian dollar could face increased volatility, which can impact import and export prices, influencing the competitiveness of Australian businesses in global markets.”
Green says Aussie investors need to prepare for turbulence but avoid making rash decisions based on short-term market fluctuations.
“Staying informed about global developments is key to understanding the potential impact on local markets,” he says.
“Working with an advisor and diversification is essential to managing risk.
Green says Australian investors should consider broadening their investment horizons to include international markets and sectors that may be less exposed to current global challenges.
“Invest in companies with robust fundamentals that have demonstrated resilience during previous economic downturns.”
“Look for firms with strong cash flows, low debt, and a history of weathering market turbulence.”
BetaShares chief economist David Bassanese says there has been increasing chatter about the ‘Sahm rule’.
The rule is an historical observation that every time the three-month moving average of the US unemployment rate has lifted by 0.5% above its previous 12-month low, it has coincided with the beginning of a US recession – and a subsequent much larger rise in unemployment.
“That rule was triggered on Friday, and along with the long inverted US yield curve and earlier inflation surge is another historical recession indicator, which will ultimately again be either vindicated or relegated to the dustbin of history.”
But Bassanese says he can’t see a reason for a sudden US lurch into recession.
“As former RBA Governor Ian Macfarlane once observed, recessions usually arise from imbalances or shocks – and the US is not really suffering from either at present, with corporate and household balance sheets still in reasonable shape and inflation almost back to the Fed’s target level,” he says.
“Rather, what we may be seeing is an easing back or ‘re-normalising’ in conditions after the post-Covid pressure cooker environment of extreme labour shortages and stimulus-driven demand.
“Of course, this negative dynamic could build momentum – inadvertently tipping the economy into at least a brief recession – a risk which the Fed is likely monitoring closely.”
Bassanese says the market is now almost fully pricing a 0.5% rate cut at the September policy meeting – which is not out of the question if economic data continue to weaken.
He says the speed and magnitude of the selloff tells us that it’s not only fear of US recession but also the unwinding of the yen carry trade following the BoJ’s latest rate rise.
Furthermore, he says while the RBA’s decided today to leave interest rates on hold, it retained an ongoing concern with upside risks to inflation.
“This concern is consistent with last week’s June quarter CPI inflation report being a bit better than feared, but still too high for comfort,” he says.
Inflation climbed slightly in the June quarter, from 3.6% to 3.8% for the year to June in line with economists’ expectations. But the trimmed mean inflation – the RBA’s approved measure of inflation – fell slightly in the June quarter from 4% to 3.9%.
“Even if the US Federal Reserve cuts interest rates next month, the RBA is unlikely to follow at its next policy meeting in September – unless there is further extreme share market volatility and/or signs of a faster-than-expected decline in inflation,” he says.
Jessica Amir, a market strategist at Moomoo, says just how much more unwinding there is to go remains to be seen.
“The reality right now is that we do not know who is blowing up, who borrowed money from Japan at 0% to buy US tech stocks, and who is unwinding that carry trade at a rapid rate,” she says.
And she says there are concerns of a liquidity crisis of sorts.
“We will find out that later down the road, but right now, globally, some investors are going into margin calls,” she says.
Amir says while Moomoo has been alright, other some trading platforms are experiencing issues as a result of margin calls.
“Meanwhile, some investment managers are opportunistically buying the dip,” she says.
However, Amir says fortune favours the brave.
“Boldness and going against the grain can fast track your wealth creation if you take a long-term view and are prepared to ride out a storm, and cop beating along the way,” she says.
She says data shows that even when markets “blew up” in 2008 during the Global Financial Crisis, the market still later went on to hit record highs after it recovered.
“The same happened in Covid – the market crashed and later hit new record all-time highs,” she says.
“So it would be remiss if we didn’t point this out.”
VanEck deputy head of investments and capital markets Jamie Hannah told Stockhead we are seeing a lot of volatility in global markets right now with nearly every asset class falling considerably, including gold bullion, which has traditionally been considered a safe harbour asset in times of uncertainty.
“There are various dynamics at play, he says.
“In the last couple of months, there has been a rotation from US large-cap to small-cap companies.
“We have also seen the tech sector boom over the last two years.
Hannah says the Magnificent 7 tech companies have led the global markets forward to unprecedented levels, but as highlighted this week, this has resulted in enormous concentration risk.
“As an investor, it’s important to have a longer-term focus,” he says.
Trading on the current volatility is the province of hedge funds, investment banks and prop trading firms.
“For regular investors, the risk is huge while volatility remains, and historically, the ensuing ripples have remained in the market for several weeks.
Hannah says there is no way to predict which way the market will turn.
“The Japanese sharemarket fell by 12% yesterday; today it has bounced back 10%… However, there are small pockets of opportunity.
“Duration and defensive assets are not so sensitive to short-term fluctuations, and we have seen this play out in the current situation, where are our global infrastructure ETF, as well as our long-duration Australian dollar-denominated bond ETFs, have held steady.”
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
News
Break It Down
News
