Tasos Hadjinicolaou: “Nothing is certain in financial markets, but it is likely that the volatility is here for a while”

Four factors were behind the global market turmoil earlier this week, Tasos Hadjinicolaou, Manager, Investment Strategy, Private & Affluent Banking Management at the Bank of Cyprus suggests, noting that while nothing was certain in this sector, he believes the volatility would remain in place for some time.

Hadjinicolaou made the comments to CBN after being asked to comment on the markets’ performances and expressed the opinion that they had been the result of four main factors.

Factor 1: Shift in policy from Bank of Japan

Hadjinicolaou highlighted the primary factor among the four: a pivotal policy shift by the Bank of Japan. This adjustment, as Hadjinicolaou clarified, had significant repercussions for the yen carry trade. The yen carry trade, a favoured investment approach, leverages the disparity between Japan’s low-interest rates and the higher rates found in other economies. The Bank of Japan’s recent policy alteration played a crucial role in the gradual dissolution of this carry trade strategy.

Factor 2: Concerns over slowing US economy

“The second factor,” Hadjinicolaou elaborated, "is the growing concern that the US economy is decelerating, with the potential of sliding into a recession. This is evidenced by data points consistently falling below expectations. Notably, this trend of disappointing economic indicators began even before August 2, extending back over the preceding month. Hadjinicolaou observed that such economic signals often prompt a shift in market behaviour. “Individuals begin to reevaluate their financial strategies when there’s a perception that the economy’s strength is waning,” he explained.

Factor 3: Companies' AI spending

The third factor concerns company earnings, he continued, noting that while these earnings had not been as bad as some feared, including when tech companies were involved, there had been some concern over the spending going into Artificial Intelligence (AI) technology. Hadjinicolaou was careful to underline that this did not reflect any concern about the quality of AI technology.

“But there were concerns that valuations were too stretched with companies concerned about how much spending was going into AI,” he elaborated, noting that an example of the result was that even though Google’s earnings were better than expected, its stock went down.

Factor 4: Geopolitical events

The fourth factor was the ongoing geopolitical events in various parts of the world which, as Hadjinicolaou noted were constantly and swiftly developing.

Rounding up, he continued that it was impossible for anyone to be sure how things would develop in the future but that it was important to avoid complacency and remember things went down as well as up, “Nothing goes up or down in a straight line.”

Hadjinicolaou also suggested that a well-balanced portfolio was better prepared to deal with developments such as European Central Bank interest rate changes and more. For example, if equities decline then fixed income can act as a buffer etc.

“Nothing is certain in the financial markets, but it is likely that the volatility is here for a while,” Hadjinicolaou concluded.