How should one read into last week’s volatility? The selloff early last week was pretty brutal and was across the board.
Cameron Brandt: The thing to remember is one should not be surprised. Markets go down as well as up. There are tremendous run-ups, multiple record highs in your market, and multiple record highs in the US and Japan. I do not think it came as that much of a surprise. The question is whether to see it as an opportunity or a warning. What we have seen from the mutual fund perspective is that equity investors are at least for the moment treating it as something of an opportunity. We are seeing a bit of buying. You are coming in on lower valuations and cheaper entry points for ETFs in key markets. Whereas investors are taking some risk off the table, high-yield bond funds, a lot of emerging markets bond funds, floating rates, and leverage loan funds they all got hit pretty hard last week.
For instance, JPMorgan believes that 75% of the yen carry trade has already kind of reversed. Any assessment that you have made to that extent. Do you think we are facing the worst of the brunt or could there be more of these ripple effects that might come through?
Cameron Brandt: I think there is going to be some more and it will have a bearing on India at least in the short run. We had seen tremendous interest over really the past 18 months for dedicated India equity funds domiciled in Japan and those flows have just rolled over so that suggests to me that there may be more to come.
Even though there was a significant unwinding of the carry trade, the Bank of Japan promptly turned around and signalled that it was going to be very solicitous in terms of not upsetting the market too much, not just raising rates for the sake of it. So, I think quite a few trades do not get unwound and are still there should things take another turn.Investors may not be taken that aback if we were to get another week of turbulence. But what is the expectation then as to the inflation data and how that could potentially perhaps calm fears about what the Fed may potentially do down the line?
Cameron Brandt: Well, I appreciate questions because we have been seeing some definite nervousness about where inflation is. There is tremendous market sentiment in favour of expecting the Fed will cut interest rates in September 50 basis points seems to be the new consensus. But we started to see money come back into inflation-protected bond funds and last week those inflows were the biggest in well over a year.
Those have been a fairly good indicator of the significance of investing publicly. Inflation is going to go and the fact that they are taking out some again ahead of a potentially significant Fed rate cut definitely to my mind is a warning that while inflation is trending in the right direction, it is the war that is far from won.