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“Opportunities Amidst Volatility and Economic Uncertainty”
In light of recent market developments, we understand that many investors are concerned about the significant pullback in major indices and the broader macroeconomic environment. Over the past month, the S&P 500 declined by 6.70%, and Japan’s TOPIX saw a sharper drop of 13.08%. At the same time, the VIX, often referred to as the “fear gauge,” has surged by a staggering 125.14%. These movements have understandably led to heightened questions and concerns.
Firstly, it is essential to discuss the growing concerns regarding a potential recession in the United States. Although the Sahm Rule Recession Indicator—a key metric for recession prediction—has risen to 0.53% as of July, the probability of a recession remains relatively low. Markets are currently forecasting an end-of-year unemployment rate of around 4.2%, suggesting stability in the labor market.
Despite this, recessionary fears have impacted market expectations for monetary policy. The market is now pricing in a 100bps reduction in interest rates by the end of 2024. This adjustment in expectations has naturally led to asset repricing across various sectors.
Historically, when the VIX front spread inverts, it can signal that the S&P 500 is nearing a bottom. The recent sharp increase in volatility could be a sign that US equities are approaching the end of this short-term downtrend.
Turning our focus to Japan, the BoJ ultra-loose monetary policy has enabled hedge funds to engage in the Yen carry trade—borrowing Yen at low rates to invest in higher-yielding assets. However, with the BoJ’s recent rate hike to 0.25%, this strategy has come under pressure. The unwinding of these trades has led to a 9.52% appreciation of the Yen against the Dollar from its recent lows. Estimates suggest that the Yen carry trade was as large as $4 trillion, highlighting the magnitude of these market movements.
Macro and CTA funds, which likely had significant exposure to the Yen carry trade, have been particularly affected. For example, the iMGPDbi Managed Futures Strategy, which can serve as a proxy for the CTA industry’s strategy, has seen substantial sell-offs following the spike in volatility. Approximately 75% of these carry trades have been unwound, erasing much of the year-to-date gains according to JP Morgan.
Lastly, looking at investor sentiment through the lens of TOPIX futures, it appears that dip buyers remain cautious although still nibbling into the market. As a whole, open interest in TOPIX futures has been trending downward, even before stocks peaked in July. This suggests that investors are still hesitant to re-enter the market, reflecting a wait-and-see approach as they assess the ongoing economic conditions.
In conclusion, while the recent market movements have been unsettling, a closer examination of the underlying economic indicators and market behaviors paints a more nuanced picture. We encourage our clients to remain invested, as these factors suggest that we may be nearing a point where it could be advantageous to begin buying the dip.
Mr. William Chow brings over two decades of asset management experience and currently oversees Raffles Family Office’s (RFO’s) Advanced Wealth Solutions division while also serving on its Board of Management and Investment Committee.
He joined RFO from China Life Franklin Asset Management (CLFAM), where as Deputy CEO from 2018 to 2021 he oversaw $35 billion in client investments. William also chaired the firm’s Risk Management Committee and was a key member of its Board of Management, Investment Committee and Alternative Investment Committee. Prior to CLFAM, he spent 7 years at Value Partners Group, the first hedge fund to be listed on the Hong Kong Stock Exchange, where he was a Group Managing Director. He started his career at UBS as an equities trader and went on to take up portfolio management roles at BlackRock and State Street Global Advisors from 2000 to 2010.
William holds a Master’s degree in Science in Operational Research from the London School of Economics and Political Science, and a Bachelor’s degree in Engineering (Hons) in Civil Engineering from University College London in the UK.
Mr. Derek Loh is the Head of Equities at Raffles Family Office. Derek has numerous years of work experience from top asset management firms and Banks – 16 Years on the Buy-side across 3 Major Cities in Hong Kong, Singapore and Tokyo. Derek demonstrates in-depth industrial knowledge and analysis, covering mostly listed equities.
As an Ex-Portfolio Manager for ACA Capital Group, Derek managed a multi-billion-dollar global fund for a world-renowned sovereign wealth fund and reputable institutional investors. Previous notable investors serviced include Norges Bank (Norwegian Central Bank), Bill & Melinda Gates Foundation and Mubadala. Derek holds an Executive MBA from Kellogg School of Management and HKUST. He is also a CPA.
Mr. Tay Ek Pon is responsible for fixed income investment management at Raffles Family Office. He has over 20 years of fixed income experience across Singapore and Japan.
Prior to joining Raffles Family Office, Ek Pon was a portfolio manager at BNP Paribas Asset Management since 2018, responsible for Asia fixed income mandates. From 2016 to 2018, Ek Pon led the team investing in Asian credit at Income Insurance. From 2011 to 2016, he worked at BlackRock, managing benchmarked and absolute return fixed income funds. Earlier in his career, he held several positions as a credit trader in banks for 9 years.
Ek Pon graduated from the University of Melbourne with a Bachelor of Commerce and Bachelor of Arts.
Mr. Sky Kwah has over a decade of work experience in the investment industry with his last stint at DBS Private Bank. He has achieved and receive multiple awards over the years being among the top investment advisors within the bank. He often deploys a top-down investment approach, well versed in multiple markets and offering bespoke advice in multiple assets and derivatives.
Prior to his role at Raffles Family Office, Sky worked at Phillip Capital as an Equities Team leader handling two teams offering advisory, spearheading portfolio reviews and developing trading/investment ideas.
He has been interviewed on Channel News Asia, 938Live radio, The Straits Times and LianheZaobao as a market commentator and was a regular speaker at investment forums and tertiary institutions.
Licenced by SFC Type 1, 4 & 9 & MAS Capital Market Services