The build up of the Yen carry trade, which got accumulated over the past three years will not unwind in a day or two, says Trust Mutual Fund's Mihir Vora, who has advised investors to ignore the volatility and build a portfolio in staggered manner with a 1-3 year time frame in mind.
"This carry trade had been building up since 2020-21, so it will not unwind in a day or two, and will have a trickle-down effect in our markets," Mihir Vora said on a CNBC-TV18 show on August 6. "Monday was a culmination of a lot of factors, and it does not mean every leveraged trade has been unwound," Vora added.
Monday's meltdown saw cryptocurrencies too take a knock, as risk-off sentiment spread and global volatility spiked. Mihir Vora highlighted this aspect as he talked about the degree of leveraged funds invested across asset classes.
JPMorgan's co-head of global FX strategy, Arindam Sandilya too echoed similar thoughts, suggesting we may not be done yet. “The carry trade unwind, at least within the speculative investing community, is somewhere between 50-60% complete,” Sandilya told Bloomberg TV on a show.
Monday's selloff had knocked out the MSCI Emerging Market Index below the 200-DMA, eroding $927 billion in combined market capitalization of EM stocks. The global carry trade unravelled, roiling world stocks this week as Japanese Yen turned volatile after Bank of Japan’s rate hike, and fears that a US Fed may be late in moving to avoid a looming recession. In last one month, the Yen has appreciated by as much as 11 percent against the US Dollar, flipping several currency bets upside down. The carry trade was a preferred bet among investors as traders had bet that the Japanese interest rates may remain low for longer.
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Mihir Vora believes that the 'confluence of goldilocks' scenario may be reducing for India, and because of the sharp reversal of the Yen carry trade the tailwind may have changed. India has been benefitting from a continued interest from FIIs, rising hopes of a Fed rate cut, and robust domestic inflow into equities, backed by a strong GDP growth rate. The policy continuity after the General Elections and a stable Union Budget have added to the sentiment, which has been boosted by an above-normal monsoon progress.
Vora's advice to investors to learn to accept volatility in equity markets for the near term, and stagger out investment instead of waiting for one major correction to deploy. "I will not go out and put all the money in one, we need to stagger our investments level wise, and time wise," he added.
A degree of calm did return to Asian stock markets on August 6, with Japan rallying more than 9% to recoup some of the losses of the previous day. This was the biggest gain for Japan's Nikkei since October 2008. However, questions have been raised about the sustainability of the rebound. “I wouldn’t expect this to be a durable bounce,” Nick Ferres, CIO at Vantage Point Asset Management told Bloomberg. “There is likely to remain volatility into October, November. Any counter trend rally today and persisting for a few weeks would be something to trim risk into.”
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