Global markets are experiencing notable declines, from challenges within Japan and the yen carry trade unwind. This event appears technical, but we are vigilant in assessing its broader implications.
Yen Carry Trade: What is It?
The yen carry trade is when investors borrow money in Japan, where interest rates are low, and invest it in other countries with higher returns. When this trade unwinds, investors sell their foreign investments to repay the yen loans, causing the yen’s value to rise and the value of foreign investments to fall.
Context
It’s essential to put the current situation in perspective. The last periods with a VIX spike this large were during the global financial crisis and COVID-19, both of which had profound and widespread economic impacts. In contrast, the current situation stems from a technical adjustment in the yen carry trade, accompanied by slightly weaker payroll numbers, while unemployment remains low. This seems to indicate a more contained and less systemic issue.
Source: Aptus via CBOE as of 08.05.2024
How We’re Prepared
- Strategic Hedging: Our approach includes implementing market hedges to mitigate downside risk, allowing clients to maintain a higher allocation to stocks while managing overall portfolio risk.
- Enhanced Risk Management: We enhance risk-adjusted performance and minimize drawdowns by blending high-quality equity exposure with protective options. This involves capitalizing on volatility differentials to generate income and protect downside risk.
- Active Management: Our active management strategy allows for nimble adjustments to manage premiums and returns efficiently. By locking in gains and redeploying them into cheaper equities, we work towards ongoing portfolio optimization.
- Resilient Portfolio Structure: Our balanced approach holds more stocks while maintaining risk neutrality through effective hedging. This helps combat longevity risk by providing potential for higher long-term returns compared to bonds.
- Volatility Minimization: Minimizing large losses and reducing the friction on compounding capital is crucial. Our strategies focus on reducing volatility for a smoother investment journey and better long-term outcomes.
- Fixed Income Enhancement: Combining investment-grade bonds with an options overlay provides consistent income and potential for growth. This strategy aims to outpace inflation and perform well in various market conditions while offering downside protection.
Continuing with Confidence
We believe that the current market decline, driven by the yen carry trade unwind, does not fundamentally alter the broader economic outlook. Historical precedents show that similar volatility spikes were associated with more severe economic disruptions. However, in this instance, underlying economic indicators like low unemployment suggest a more resilient economic backdrop. That said, should things continue to deteriorate we (and portfolios) are prepared.
As a result, we are prepared to hold what we own and not make any abrupt changes. Our commitment to strategic hedging, active management, and a balanced approach to stocks and bonds ensures we are well-positioned to navigate through this period of turbulence. We will continue to manage your investments with a focus on stability and growth, and we remain confident in our ability to provide you with resilient and optimized portfolios.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2408-11.
