| The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions. Market Watch  Despite global markets going into a bit of a panic Monday following the global sell-off – which will be discussed – the JSE All Share recovered quite well over the week, closing out at R 80 739.31, with a 2.25% increase.  The S&P500 closed the week out at 5 344.16, marking the best gains the index has seen since 2022, despite the chaos that ensued during Monday’s selloff.  Decoding the last week – Carry-trades It’s been one of those gut-churning weeks where the stockmarkets get all the headlines, and the doomsday prophets crawl out from the woodwork and hope that maybe this time their prediction of a market crash will prove right (after all even a stopped clock is right twice a day). Last week Cobie wrote a piece on Japan, neither of us thinking that this would be a fall-out, and over the rest of last week things began to unravel – and Japan was the catalyst. You’ve probably heard the phrase ‘carry trade’ a lot this week – but what is it? Very simply, Japan has had ultra-low interest rates for decades now,– and from time to time those go negative – and their stockmarket has been in the doldrums. Interest rates and yield available elsewhere are often hundreds of basis points (100 basis points is one percent) higher. So what some speculators (including hedge funds) do is borrow money in Japan at those ultra-low rates, convert them (usually) to dollars then use those funds to buy assets elsewhere, often leveraging them. That’s a hefty, buzz-word laden sentence, with all different consequences at every step – so for those of you who aren’t familiar with asset management, bear with me as I unpack this for you:  Currency volatility and how it affects everyone’s investments and the markets If you look at the graph below of the yen v the US dollar for decades you can see that the yen topped out v the dollar at 76 Yen to the dollar in early 2012. Slowly depreciating and reaching 112 Yen to the dollar in early 2022, and it has been depreciating steadily since then –as a deliberate policy move by the Japanese – peaking at around 160 in June this year, a 38% appreciation in 5 years.  It is now circa 145 after this mini-meltdown. The graph below shows the last 6 months. On the 31st of July, the BOJ (Bank of Japan) announced the first interest rate hike in 15 years.  To use an example of exactly how this works in real life – let’s look at the following scenario: An investor took a 160m Yen loan in the beginning of July. They then converted the loan to $1m in cash. They then used the $1m to buy a leveraged stock putting down 10% ‘deposit’ (that is not even a very aggressive leverage – it can go as high as 1:200) Interest rates have risen in Japan, so now the interest payment on the loan has probably increased severalfold, significantly eating into the profits. Now the $1m is only worth 140m Yen – 20m Yen shy of what they borrowed, so to settle the loan – before the new interest charge – is circa $150k that they’re going to have to chip in. To add insult to injury, because all the carry-traders are dumping stock to get ahead of the problem, stocks start to tank – too many sellers and not enough buyers and the leverage loaners ask for more money to add to the ‘deposit’ – a margin call. Until all the margin calls and carry-trades unwind it becomes a vicious circle. Every investor gets hurt – unless they stick out the volatility and let it resume normality which becomes more difficult if you are leveraged as your losses are amplified Speculators and hedge funds that got caught short would have been hurt. This investment ‘philosophy’ is highly risky and should be left to the leverage professionals (hedge fund managers) or the greedy.  |
| Leveraging a portfolio Leveraging a stock involves borrowing money from someone to increase your investment’s potential return. Essentially, it allows you to control a larger position in the stock market than you could with just your own capital. The sheer magnitude of this correction is a good indicator of just how much speculation and carry-trade was going on in the background (maybe as high as $4tn, more than the Japanese GDP). Of course, this then contaminated the ‘normies’ – the ordinary investors, and even the professionals got caught up in the drama and chaos.  Japanese reaction So, what happened in Japan while this mini-crash was reverberating around the globe? It wasn’t pretty. No market bore the brunt as much as Japan. A key Japanese stock index, starting last Thursday, experienced its most severe two- and three-day trading drops since the 1950s — declines that analysts said could not be fully explained by the same factors affecting other countries.  TOPIX (Tokyo Exchange) Japan had one unique element exacerbating its problems. Its weakened currency, which had been inflating corporate profits and valuations, was beginning to appreciate at an alarming rate (we saw that in the graphs above). The turmoil has threatened one of the most enduring stock rallies in Japan in decades. Many reasons have been given for the strong performance of Japanese stocks starting early last year. Cobie and I talked about this a few weeks ago. Warren E. Buffett’s Berkshire Hathaway expressed optimism about Japan as an alternative investment to China. The Tokyo Stock Exchange ramped up pressure on companies to enhance shareholder returns. However, as the yen strengthened over the past week, it erased much of the gains Japanese stocks had accrued this year. Investors have been left reassessing whether the much-hailed renaissance in Japanese equities was a result more of a weakened yen than of underlying structural changes. The yen crossed below 150 to the dollar on Friday 2nd Aug. Just weeks earlier, it had been trading above 161. The weak yen played a crucial role over the past few years in supporting the shares of major Japanese companies, especially exporters that saw the value of their earnings overseas boosted. Many of Japan’s signature global brands, including Toyota Motor, reported record profits. That drew money from investors and drove Japanese indexes to record highs.  More signs of an interest rate cut in the US Mortgage rates in the US have fallen to their lowest level in more than a year, a balm for prospective home buyers and sellers in a challenging real estate market. The average rate on 30-year mortgages, the most popular home loan in the United States, dropped to 6.47 percent this week. That rate has been steadily easing since April, when it rose above 7 percent — a relief for not only buyers, but also potential sellers who have felt locked into lower rates on their existing loans and have kept their houses off the market. The decline, from 6.73 percent a week earlier, was the biggest this year. Mortgage rates stood at around 3 percent in late 2021 – so they need to halve before getting back to that level. They began climbing when the Federal Reserve started raising its benchmark rate to combat inflation, reaching levels not seen in two decades. Weak jobless report adds to market jitters The U.S. economy has spent three years defying expectations. It emerged from the pandemic shock more quickly and more powerfully than many experts envisioned. It proved resilient in the face of both inflation and the higher interest rates the Federal Reserve used to combat it. The prospect many forecasters once considered imminent — a recession — looked increasingly like a false alarm. Until this week when all the doomsayers piled in. An unexpectedly weak jobs report on Friday — showing slower hiring in July, and a surprising jump in unemployment — triggered a sell-off in the stock market as so pundits worried that an economic downturn might be underway after all. By Monday, that decline had turned into a rout, with financial markets tumbling around the world – it has since recovered. The lesson here is not to make a knee-jerk or rash decision when emotions are in full spate. If your portfolios have been properly designed and managed, routs in the market will give your asset manager the opportunity to buy quality stocks with long term potential ‘on sale’.  NHI We haven’t heard much about one of my favourite topics for a while – the NHI (National Health Insurance) Last week there was a roadshow started with a meeting with doctors in KwaZulu-Natal at the weekend. President Cyril Ramaphosa assented to the NHI Act in May, but none of its sections have been promulgated yet (in other words it is not yet in force). If you remember, numerous parties lobbied for changes to the NHI Bill when it was before parliament, and petitioned the president not to sign it into law, saying the bill was unconstitutional and unaffordable, and would damage healthcare and investor confidence. The roadshow just repeated platitudes and it is clear that the government still isn’t taking the opposition to the bill seriously, and we can expect the court challenges to start. The act already faces two legal challenges, one from Solidarity and the other from the Board of Healthcare Funders, which represents medical schemes and administrators. One of the biggest issues is that none of the concerns from the numerous public meetings were taken into consideration. In effect this bill was steam-rollered through parliament by the ANC, it has such enormous implications we could well see a major fallout in the GNU if the ANC digs in their heels. Realistically, I think everyone hopes this issue quietly gets put on the back burner for a few more years. Remember that the ANC has yet, in the 20 years since the idea was first floated, to publish any budget, let alone addressed how this will be funded. Universal health coverage is something we can all get behind – and surprise, surprise, we already have it. The fact that it is broken and riddled with inefficiency and corruption is beside the point. Watch this space…  Lest you forget… its called volatility Some of us might have forgotten that markets can be volatile. The old adage .. what goes up must surely come down has been proven right by the markets since the first of August when markets had three straight days of losses. Social media was abuzz with the calling of the next great bear market. Surely markets have now seen positive results for so long that we are all long overdue a bear market. Many pundits will point to the fact that over the last decade, we may have seen short sharp periods of market pullbacks most notably the Covid crisis and the inflation crisis of 2022, but that markets have trended higher making investors wealthy in the process. The reality is that eternal bears will always find the proverbial boogeyman behind every macro event, but if you had to act on each of these you would pay away any hard-earned returns in brokerage fees as you sway in and out of markets. The investment world is just not that simple. For those that are still in doubt, markets are cleverer than us. Their efficiency quickly prices in new information to set a new equilibrium for asset prices. What is interesting is that the correlation between market returns and interest rates have somewhat broken down. Generally speaking, a rise in rates would put the brakes on the economy and by default stock prices, or as 2008 proved bring forth a mortgage crisis which was simmering under the surface in any case. But this time round this did not seem to happen. We didn’t see equity prices fall meaningfully. Has the market become somewhat less efficient? Firstly, the Federal Reserve and the Treasury have both been involved in quelling the fallout from the Covid crisis. Covid cheques were a real thing which artificially boosted spending power. Secondly the mid-tier banking crisis, as a result of US rates rising to levels last seen in 2006, required the FED to step in. Both of these events have kept the monetary wheels oiled leaving the market to find higher levels. Markets kept on rising. Then in early 2024, the US Treasury started refinancing those bonds which were coming up for renewal. No one wants to refinance debt at high rates, so the Treasury opted to issue short-dated notes even though a longer-dated bond, which came up for maturity, required refinancing. They are doing this because it gives them a second bite at the cherry. The refinanced short-dated bond will come up for renewal again in the next 2 years and by then the FED would have dropped interest rates allowing the Treasury to issue longer-term bonds at a yield more favourable to them. Two things spring to mind here: Firstly, the FED has to reduce rates to make the US economy viable. Secondly, a bond market with a balance of issuance across various maturity buckets (called the yield curve) are required for the smooth functioning of any government. You can see that the FED and the Treasury are acutely involved in the bond market at present. The future of the US economy depends on their efforts. This is probably what is creating the break in historic correlations between the FED funds rate and the market. The next move will be for rates to fall in the US as there is now ample evidence of a slowing jobs market and a reduction in inflation. Add all the liquidity on offer by authorities and markets are again proving that they are cleverer than any single stock operator. So before the news gets the better of you and you sell your whole portfolio, remember that the market already knows the future because it’s cleverer than you. Money is made by time in the market… not timing the market. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R18.32 (R18.26, R17.95, R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09).  The Rand/Pound closed at R23.39 (R23.28, R23.32, R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62)  The Rand/Euro closed the week at R20.01 (R19.94, R19.58, R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35)  Brent Crude: closed the week down at $79.43 ($77.56, $85.03, $83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39)  Bitcoin closed at $60,847 ($61,903, $59,760, $56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135). Articles and Blogs: Pruning your wealth farm NEW Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor ? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |