BNP Paribas suggested yesterday that stock investors remain on the sidelines for the time being, warning that volatile markets around the world may not stabilize any time soon as arbitrage investors reduce their risk portfolios.
It is better off for investors to hold back, Paul Mortimer-Lee, BNP Paribas' London-based head of market economics, said in a media briefing in Taipei.
The analyst said that he expected to see further reduction in risk appetite, as the yen "carry trade" had not yet finished and investors were likely to scale back their positions in the future.
Besides a slump in Chinese equities last week, analysts have attributed arbitrage investors' adjustment in yen carry trade as a key reason for the recent plunges on global stock markets.
CARRY TRADE
In carry trade, investors fund the purchase of higher-yielding -- and usually riskier -- assets by borrowing money in a low-yielding currency. It has been popular in recent years for international investors to borrow the low-interest yen to buy New Zealand or Australia currency-denominated products or stocks.
Stock markets could continue to be weak until the US Federal Reserve (Fed) starts interest rates cuts in the second quarter on a backdrop of the US' weak economy and a more comfortable core inflation level, Mortimer-Lee said.
A pessimistic BNP Paribas expects the US economy to grow by 2 percent this year from a year ago, compared with Lehman Brothers' 2.4 percent forecast.
US FORECAST
The French bank predicts that the Fed will cut its Fed Fund rates by 50 base points during the April to June period, bringing down interest rates to 4.75 percent, and continue to reduce rates to 4 percent by the end of this year.
"It is a hard landing story in the US," Mortimer-Lee said, adding that the US' economy was in trouble and the weakness would spill over from the housing sector to other industries, such as construction and manufacturing.
He also expects a loss of 1 million jobs and payrolls correction that will in turn dent consumption.
This would not be good news for Taiwan as the nation's exports would be affected by the US slowdown, Mortimer-Lee said, who suggested that Taiwanese manufacturers diversify their target markets to sustain their business.
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