[Viewpoint]Take stock during uncertain timesDue to China’s announcement of a belt-tightening policy on one hand and the suggestion that the U.S. economy may slide into a recession on the other, stock prices in the world’s major markets are fluctuating. The instability of international financial markets will grow even worse if such a sharp fluctuation of stock prices results in the disappearance of the so-called “yen carry trade,” a strategy of investing in other countries with money borrowed from Japan at a low interest rate.
Stock prices are a mirror that reflects the economy. Sometime in the latter half of the 1990s, the information technology revolution brought vitality to the international economy, led by the United States. Thanks to the development of information technology, the American economy, in particular, reached its goal of a “new economy,” in other words, high growth and low prices.
American households increased their consumption based on the development of that new economy. The surging demand of American consumers could not be satisfied only by American businesses. Chinese manufacturers provided American consumers with a variety of goods at bargain prices. China then used a large portion of the money it earned from exporting to the United States to purchase American government bonds.
American consumers, for their part, could spend more on consumption because China not only supplied them with cheaper products, but also induced lower interest rates by buying American government bonds. This, in return, made it possible for Chinese manufacturers to produce more goods. To manufacture more, China needed more raw materials and half-finished goods.
As a result, the prices of raw materials, including oil, increased and the economies of South Korea and Japan, which exported half-finished goods to China, got a boost. Thanks to harmonious relations between American consumers and Chinese manufacturers, the world economy recorded high growth and stock prices increased consistently during the past couple of years.
However, the American consumers, which had been the prime movers of international economic growth, are faltering. They believed the new economy would sustain itself. Interest payments on loans now swallow up 14 percent of the average American’s disposable income. As the price of real estate also started to drop in the latter half of last year, the purchasing power of American consumers decreased even more. In practice, American businesses are reducing employment and investments while they readjust the scale of production.
The growth of consumption of the U.S. economy, which played the pivotal role in the world economy, is slowing down.
China, another axis of the world economy, is now following a belt-tightening policy to prevent a bubble from excessive investment. Thus, stock prices on the international market continue to fluctuate.
The “yen carry trade” is another river that the international financial market has crossed.
As the value of assets in newly emerging markets grows unstable, investors turn their eyes to safer targets. The profits from American government bonds are declining. The value of the French franc is rising higher than other currencies, including the Australian dollar. The Japanese yen is getting stronger.
If the market participants’ expectations about the increase of the value of yen become reality, the “yen carry trade” could disappear in a short time despite the big gap between the interest rates of Japan and other advanced countries. When the “yen carry trade” was established in 1998, the value of the yen went up rapidly, and Long Term Capital Management, an American hedge fund, was driven to the brink of bankruptcy. This time, too, there will be similar casualties. We should be prepared to cope with sharper stock price fluctuations.
It is highly likely that the United States will respond by lowering interest rates. If the United States does so, it will provide an opportunity to promote the growth of the American economy again in the latter half of this year by stabilizing the real estate market.
China will stop its belt-tightening policy temporarily. If we see the future with a longer perspective, China is now changing its role from simple manufacturer to consumer in the world economy as well, on the basis of increased income. The undervalued Japanese yen will recover gradually.
There is no wrong weather. There are only wrong weather forecasts and unfit clothing for that weather. Daring to put on a garment called stocks when the expectation for the settlement of the “yen carry trade” is high could be a good investment strategy that could yield higher profits.
*The writer is a vice president of Daehan Investment and Securities. Translation by the JoongAng Daily staff.
by Kim Young-ick
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