The Market Where Optimism Does the Policy Work

There is a faraway market where the rules of macroeconomics have recently been refined.

In most countries, rising oil prices tend to push bond yields higher. Inflation risks rise, central banks tighten, and markets behave in ways that textbooks recognise.

In this particular economy, the opposite often happens.

When Brent rises by $10, the 10-year yield has been known to fall by a few basis points, helped by the invisible hand of an “others” category buyer. The currency also becomes the best performing amongst its peer group. The invisible hand lands pre-open and watches over what happens next.

Economists have tried to model this behaviour with limited success.

Local traders have a simpler explanation.

Confidence.

Confidence, it appears, has quietly joined interest rates as a policy instrument. Some would argue it has replaced several others.

Foreign investors also enjoy a uniquely pleasant experience there. Should they ever wish to exit, domestic investors ensure they can do so comfortably. Mutual funds, insurance companies, and pension funds collectively absorb the selling.

Hospitality, after all, is a deeply embedded cultural value.

Retail investors have embraced their role in this ecosystem with admirable dedication. Equity markets may go through extended periods of delivering little in the way of returns, but monthly investment plans continue regardless.

Investing has gradually evolved into something closer to a civic responsibility.

Returns, while welcome, are increasingly optional.

Financial commentators have been helpful in guiding investors through this arrangement. Whenever markets decline, they explain patiently that such moments represent opportunities to create long-term wealth.

Retail investors who have seen little return over the past several months appear willing to accept this advice with remarkable calm.

The index and its constituents now appear to be leading largely separate lives.

Remove the large banks and government companies, the names that dominate most retail folios and mutual-fund portfolios, and much of the remaining market trades at distinctly higher levels.

Earnings have not complicated this picture unnecessarily.

Roughly 28% of mid-cap companies reported shrinking profits last quarter. Another 40% managed growth of less than 10%.

The prevailing valuation multiple for this group remains enthusiastic.

In most markets this might prompt a few uncomfortable questions.

Here it prompts a webinar.

Participants were reminded that volatility is the price of long-term returns.

The monthly investment continues.

Policy thinking has also adapted to this environment. Rather than rely on rigid frameworks or elaborate contingency planning, policymakers prefer flexibility.

Responding to events after they occur allows decisions to be taken with the benefit of hindsight and optimism.

Planning ahead, by contrast, risks tying up scarce resources in problems that may never arise. It can also create the impression that preparation is necessary.

Meanwhile, the rest of the world continues to experience volatility in interest rates, currencies and capital flows.

Yet this particular emerging market remains an island of serenity.

Foreign investors remain curiously unconvinced by such stability and have continued to reduce their exposure.

They appear not to share the long-term perspective that domestic investors have embraced.

Policymakers occasionally describe this as puzzling.

The challenge, it seems, is figuring out how to persuade them to see things the right way round.

The country nevertheless remains among the fastest-growing economies in the world. This is widely seen as confirmation that optimism, flexible policymaking and enthusiastic domestic investors together form a durable growth model.

Markets occasionally attempt to question this optimism. They are gently reminded that confidence itself is a policy instrument.

Even global crises can be interpreted constructively. Periods of volatility offer opportunities for investors to accumulate assets and for policymakers to gain additional practical experience.

In this faraway emerging market, disruptions are therefore welcomed as useful exercises. After all, when little ever goes wrong, crises are helpful for practice.

Disclaimer: Any resemblance to real countries, policymakers, markets or investors is purely coincidental.