What was behind the recent market volatility in the U.S.?
There were technical reasons behind the recent stock market fall in the U.S. Some volatility trades were unwound and we heard a lot in the media that the severe market swings were a purely technical thing and we do not have to worry about it. There is an element of truth in that but investors should also just be a bit cautious about the U.S. cycle. It does look quite late in the cycle and the U.S. market is not cheap. Bond yields are going up, which is causing a spike in market volatility. If bond yields continue to rise, then the market may see more selling pressure unless corporate earnings can accelerate.
What would it take for U.S. earnings to pick up?
It requires either a more inflationary environment in the U.S., so companies can raise prices, or wages need to be depressed or to not rise by much. Both scenarios are unlikely. If inflation were to pick up, I think the Federal Reserve would be likely to raise interest rates even faster. As for wages, it is difficult to see how wages remain depressed with the unemployment rate so low. U.S. corporations have also been squeezing wages for quite some time.
How does the spike in U.S. market volatility affect Asia?
Investors should not expect Asia to be immune to any weakness in the U.S. stock market, but Asia looks to be a lot earlier in the cycle to me. By that I mean, Asia has been allowing wages to rise over the past five or six years so you can go through a prolonged period of policymakers favoring corporate profits. Many countries in Asia, including Japan and Thailand, need inflation. China can have higher rates of inflation, so inflationary pressures are not that much of a concern in Asia.
Valuations in Asia appear much more reasonable than they are in the U.S. So whereas any sort of further weakness in the U.S. market is obviously going to be felt in Asia, the region has a lot of things going for it in terms of the better earnings cycle, a greater ability to withstand inflation and cheaper valuations. It's difficult for me to say how much of the fall in the U.S. was short-term technical and how much is because the economic cycle seems to be a little bit long in the tooth. It is far easier for me to say from a relative point of view I think Asia is actually quite well-placed to withstand any weakness in the U.S. market.