Volatility: Unraveling of yen carry trade could have further knock-on effects in India, says Cameron Brandt

Cameron BrandtResearch Director, EPFR Globalsays equity investors They are trying to market volatility as an opportunity and there is some buying. Investors are entering the market at lower valuations and cheaper entry points. ETF (exchange-traded funds) in key markets. However, as investors eliminate some risks, high yield bond fundsa lot emerging market bond fundsFloating rates and leveraged loan funds took a big hit last week.

How should one interpret last week’s volatility? The sell-off at the beginning of last week was quite brutal and widespread.
Cameron Brandt:The thing to remember is not to be surprised. Markets go up and down. There are huge rallies, multiple all-time highs in your market and multiple all-time highs in the US and Japan. I don’t think it was a huge surprise. The question is whether you should look at it as an opportunity or a warning. What we’ve seen from a mutual fund perspective is that equity investors, at least for the moment, are treating it as an opportunity. We’re seeing a bit of buying. They’re coming into the market at lower valuations and cheaper entry points for ETFs in key markets. While investors are taking some risk off the table, high-yield bond funds, many emerging market bond funds, floating rates and leveraged loan funds were hit hard last week.

For example, JPMorgan believes that 75% of the yen carry trade It has already reversed somewhat. Have you made any assessments in this regard? Do you think we are facing the worst or that more such effects could occur?
Cameron Brandt: I think there will be more and that will have an impact on India, at least in the short term. We have seen huge interest over the last 18 months in Indian equity funds domiciled in Japan and those flows have been renewed, which suggests to me that there may be more to come.

Although there was a significant unwinding of the carry trades, the Bank of Japan quickly took notice and signaled that it would be very careful not to disrupt the market too much, and would not raise rates just for the sake of it. Therefore, I think that many trades will not be reversed and will continue to exist if things go another way.Investors may not be all that surprised if we see another week of turbulence, but what are the expectations for the inflation data and how might it calm fears about what the Fed might do next?
Cameron Brandt: Well, I appreciate the questions because we’ve been seeing some nervousness about the inflation situation. There’s a lot of market sentiment in favor of expecting the Fed to cut interest rates in September; 50 basis points seems to be the new consensus. But we’re starting to see money coming back into inflation-protected bond funds, and last week those inflows were the largest in over a year.

These have been a pretty good indicator of the importance of investing publicly. Inflation is going to rise and the fact that they are pulling some money out again ahead of a potentially significant Fed rate cut is definitely, in my view, a warning that while inflation is trending in the right direction, it is a war that is far from won.