The carry trade.

The carry trade
Much of the froth in emerging market stocks has been attributed to the “carry trade”, which involves buying assets with high yields funded by borrowing in low-interest locations. Japan, with its ultra-low interest rates, is the natural home for this sort of borrowing. Recall that the crash in emerging markets last February was exacerbated by the unwinding of these trades.
Since February, however, the rupee has appreciated by 8.5% against the yen. An investor who borrowed in yen at that time and put the money in the Indian money market would not only have gained the interest differential of almost 7 percentage points between Indian and Japanese short-term paper, but would also have made another 8.5% on the rupee appreciation.
Of course, hindsight is always 20:20. The big question for emerging market stocks is whether the carry trade will continue.
This is what Deutsche Bank’s India Equity Strategy note says: “India offers a relatively high carry among emerging markets...Risk of the carry trade unwinding remains, but with the Bank of Japan likely to stay on hold and widening interest rate differentials versus the yen, carry returns may remain positive this year as well…”
That was before last Friday’s Bank of Japan meeting, in which the Japanese central bank said that consumer prices would rise a mere 0.1% in the year to March 2008. What’s more, the core consumer price index declined 0.3% year-on-year in March. Industrial production, retail spending and household spending growth all slowed. That should make it difficult for the Bank of Japan to raise interest rates anytime soon. Taken together with a weak yen, announcements of the demise of the carry trade are likely to be very premature. That augurs well for emerging market stocks.

 

DOES anyone see it:

This is just TOOOOOOO EASYYYYYYY.





An investor who borrowed in yen at that time and put the money in the Indian money market would not only have gained the interest differential of almost 7 percentage points between Indian and Japanese short-term paper, but would also have made another 8.5% on the rupee appreciation.

 

And who says the markets are efficient???