Through Carlo De LucaHead of Asset Management at Gamma Capital Markets
To understand if we are facing a physiological decline, we must first understand the causes of the correction. It’s not the unemployment number, although it’s true that the markets are up almost entirely because of technology. In reality everything was triggered by the monetary divergence between the Japanese central bank and the Fed or rather to revaluation of the yen. Many operators do not buy with their own currency but by borrowing securities with currency at lower rates: in the last thirty years many leveraged operations in yen have been developed to buy shares in dollars or euros . If the yen raises interest rates and in the future the Fed lowers its interest rates, loan operations are closed because the market becomes more expensive so everything is sold. If large operations are formed in this way, the so-called margin callsloans are automatically closed because stocks are falling. Creates too much downside that could trigger central bank intervention.
In recent weeks, we have highlighted that the markets have not recorded a “healthy” cycle, and mainly in the last three to six months there has been no participation of the entire technology sector. The thing we have to remember is that although there was a reaction to bad news, actually the American unemployment figure is quite misleading for the market because it masks the real news market moversor the rate hike in Japan, market trigger of the worst decline in the Japanese stock market since 1987. To tell the truth, we haven’t missed the revaluation of the yen in recent weeks; therefore, we are not surprised that they have started to dismantle leveraged operations. This past week we reduced our exposures knowing that these leveraged operations (carry trade) they are just a bit speculative and above all, if the shares fall too much, they have a coverage level that has to do with the recall of the collateral and the closing of the loan. This is the real reason for today’s losses.
In perspective, let’s not forget that we are facing a very strong bull market due to the underlying megatrends related to technology and these declines do nothing but good for the current secular trends. An investor who invests in quality shares, even if he loses 20%, will face the greatest buying opportunity in recent times. There may be strong profit taking but however, we remain positive because if there is a structural the central banks will be forced to intervene.
Are we really moving from a soft landing scenario to a recessionary one? Let’s wait…
Also being an election year in the US, this decline also represents a good reason to initiate very accommodative monetary policies, so the market is already discounting five rate cuts by the end of the year (50bp in September, 50 in November and 25 in December). If, then, the deleveraging (dissolving carry trade operations) is particularly extensive, We do not rule out that the Fed may also continue with QE.
Operationally, so far the stock market has already discounted technology stocks to excellent levels (-18% from 2024 highs) with semiconductors losing up to 30% from their highs. We enter these levels. Right now we only buy technology, mostly semiconductors.
The bond market responds well as a function of portfolio rebalancing, benefiting from a rotation from quality flight which discounts later rate cuts.
Where exogenous factors occur such as war or a severe slowdown due to unemployment, there will be interventions such as QE as in the past; therefore, we are not worried about financial markets in the medium term.
Because of this, we cannot rule out violent movements for both dangerous properties that for bond markets.
How long does it take? We are likely to see a lot of volatility but this is not the time to panic or overbuy.
It is time for a balanced and careful choice.
Avoid DIY is the first rule.