In recent weeks, the global stock market has experienced significant volatility due to various factors such as stretched positions, recession fears, and policy uncertainty. These market swings have been exacerbated by thin trading activity. The sudden willingness of the Bank of Japan (BOJ) to incorporate the yen as a factor in setting policy has accelerated the unwinding of carry trades that use the low-yielding yen to buy other assets. Speculators rushing to close their short-yen positions have driven one of the largest unwinds in yen futures on record. The unwinding of carry trades and the closing of the gap between currency and rate spreads have contributed to the stock slide.
Unwinding of Carry Trades
The BOJ’s unexpected rate hike in July and its blurring of its policy framework, including the yen as a factor, have caused us to reconsider our positive view on Japan. However, we believe that the BOJ will be forced to walk back on its decisions, and we expect them to proceed cautiously on policy. Therefore, we maintain our overweight position on Japanese stocks on a currency-unhedged basis. Despite the risk of further carry trade unwinding and yen strengthening, we are optimistic about the virtuous circle of inflation driving wage growth, corporate pricing power, and earnings. We also believe that corporate reforms aimed at adding shareholder value are crucial.
Slowdown, not Recession
While Japan has been heavily affected by the recent turbulence in the stock market, U.S. recession fears have further exacerbated the slide. However, it is important to note that the unemployment rate in the U.S. is still relatively low compared to historical standards. The rise in the unemployment rate is primarily due to a growing labor force tied to immigration rather than job losses. In fact, total U.S. payrolls have grown by over 1 million in the past six months, which is well above pre-recession levels. Various indicators, such as jobless claims, ISM services data, and the Fed bank lending survey, suggest that the U.S. economy is experiencing a slowdown rather than approaching a recession.
Strong U.S. Corporate Earnings
Despite the concerns surrounding the stock market, U.S. corporate earnings have been stronger than expected, particularly in the technology sector. According to LSEG Datastream data, Q2 earnings growth for tech sectors is at 20%, compared to 5% for non-tech sectors. These figures have exceeded initial expectations of 18% and 2%, respectively, at the start of the earnings season. While the technology sector is leading the charge, non-tech sectors are also expected to show their first earnings growth since late 2022, indicating that strong earnings may be broadening out. The easing of cost pressures and moderate inflation have been beneficial for U.S. corporations.To get in contact with one of our wealth creators, click here.
