Commentary – Market Volatility
A few comments on the recent market volatility
Global share markets have entered a correction phase following news last week of higher US unemployment figures.
Two factors are in play. Firstly, there is speculation in the media that we are heading for a recession – and the fear of recession is ending the tech and AI stocks rally, as well as the rally in bank stocks.
The second dynamic influencing the market is the rising interest rates in Japan. This is cancelling out the ‘carry trade’, where hedge funds and other large, leveraged global investors borrow a currency in an economy that has very low interest rates (currently, the Japanese Yen) and invest in rising stock markets (mostly US tech and global financial stocks).
Last week, interest rates in Japan rose (from zero), so borrowers have started to close out their borrowed Yen positions by selling global tech stocks.
The current market sell-off is about traders repositioning their portfolios by divesting hot sectors like tech and AI and then investing more defensively.
Sadly, good stocks also get caught up in these corrections. Further falls from here, and we should see value investors entering the market.
Globally, there are no significant financial imbalances. Bank lending standards and growth in debt have been increasing. Typically, when recessions commence, these standards fall, not rise.
Government fiscal spending and corporate AI-related investment remain supportive. Significant ongoing levels of investment in manufacturing are strong.
My view is that we are not looking at a global recession, which would require business redundancies. But I will monitor this space over the next six months.
Central banks worldwide have the right policy tools available to support periods of market volatility. We are already seeing this with the commencement of an interest rate falling cycle. Their most powerful tool (the lowering of interest rates) is available to mitigate market volatility risks.
We have seen the Euro region, the UK, and Canada start this cycle. The US will cut interest rates next month.
A market correction (a fall between 6% to 8%) usually happens once or twice a year, but this time around we haven’t had one for several years, due to the pump priming that occurred following COVID.
At this point in the cycle, recession panic is misplaced.
Please don’t hesitate to contact me should you have any questions.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
Website: kauriwealth.com.au
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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