“Just because it makes a good story, doesn’t mean it’s helpful,” according to Premier Miton multi-asset manager Anthony Rayner (pictured), who warned in his latest ‘Perspectives’ note that investors need to take a step back from the noise following the recent shock in global markets.
Taking volatility in Japanese markets as an example, he says a preference for straightforward stories is how narratives tend to build in markets, even though often there is a wider or more nuanced picture to appreciate.
“In this sense, when financial markets are exposed to some sort of shock, as they were at the beginning of August, investors tend to look for the most obvious, reasonable-sounding explanation. Then they try to back-fill events with that story, providing a degree of comfort.”
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Since the Nikkei plummeted 12% in a single day on 6 August, much of the fallout has focused on the role of the yen and the carry trade, unhelpful Bank of Japan communications and weaker than anticipated US economy data prompting recession fears.
“This is understandable,” says Rayner, “as this was the scene of a lot of the stress, and it makes a good story. However, this encourages investors to focus on that same dynamic, rather than the broader picture.”
Over the longer term, he adds there has been an important change in the dynamic of the world economy.
Countries have moved on from largely synchronised moves, from initiating Covid lockdowns and the post-pandemic loosening of monetary and fiscal policy, to economies once again making decisions in accordance with their own direction.
This is exhibited by the BoJ raising rates at a time where the Fed looks set to cut rates, which shows how economies, and related policy, are moving in different directions.
“Of course, on many levels this should be celebrated,” Rayner adds. “The BoJ picking rates up off the floor, from insanely low levels, and the US feeling comfortable enough about the inflation picture to suggest that cuts are on the way this year.
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“Furthermore, that economies and policymakers are moving in different directions is a healthy sign from an economic perspective, and also from the perspective of global funds that are looking to diversify their assets across different sources of risk globally.
“On another level though, the ructions the BoJ prompted, despite only moving rates from near zero to 0.25%, will not be forgotten and say something not just about the famous carry trade but also about how fragile the Japanese economy still is, particularly the consumer.”
He adds that there is no doubt the BoJ will be more careful in communication moving forward, while investors will be focused on the yen and the carry trade.
“However, while investors are looking that way, the wider picture is that economies and policy-making are becoming less synchronised and this will throw up new dynamics. For example, via changing interest rate differentials and their impact on currencies, as well as opportunities, particularly opportunities to diversify.
“This is not to say that that’s the end of market instability in the short term but just that investors shouldn’t expect stress to show up just via the carry trade, as many lessons should already have been learnt there.”
