In July 2017 when the Cboe Volatility index spiked, Goldman Sachs was the first to sound the alarm. It warned that the sale of risk-parity funds, which purchase government bonds that they use to hedge stock portfolios, might cause a major offloading of shares. However, the S&P 500 has been doing quite well since then. This shows that you should not always listen to their warnings.
This happened again on Monday when the Dow suffered the worst intraday point plunge in its history. In this instance, Goldman pointed an accusing finger at managed-future funds, which were on a selling spree. According to Goldman, if this continued, there could be a major unwinding of these portfolios, which the bank estimated could hit about $190 billion globally.
Asia Felt the Pain
On Tuesday, Asia was a sea of red. Emerging markets saw over $14billion of fund inflows; this means that some unwinding was expected. The markets in Vietnam, for instance, have lost over 10 percent this week after gaining 53% in 2017. In 2017, the frontier Southeast Asia frontier market received over $1 billion in investment.
Why the Markets Will Recover
It is important to keep in mind that Goldman makes money when markets are volatile. Besides this, the emerging markets of Asia, and especially China, offer more protection against the rise of the machines. On Monday, bargain hunters from the mainland bought over $1.6 billion of stocks in Hong Kong through exchange links between Shenzhen and Shanghai. This option did not exist a few years back. As long as the US dollar remains weak, shares in the city will remain lucrative to mainland investors.
In November, the Chinese government vowed that it would curb risk in the nation’s $15 trillion asset-management sector by asking funds to morph to transform into staid mutual portfolios. This move saw the growth of long-only mutual funds and inflows to Hong Kong stocks, which are seen as safer and cheaper. Without these inflows from Mainland China investors, the Hang Seng Index would look much worse.
According to a recent survey, Chinese investors accounted for about 9 percent of all market turnover in July 2017. This put them on an equal footing with investors from the US and UK. This presence of mainland investors will only continue to grow.
It is also worth noting that emerging markets in Asia never recovered fully from the 2013 capital flight that was triggered by fears of a rise in US interest rates. Markets such as China, Thailand, and Malaysia are still far from their peak. Thus, Asia might just save the stock exchange market, contrary to warnings from Goldman.
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