01 July 2018

With Topix having approached near the bottom of this year's trading range, there were some support appearing despite the foreign selling as tech stocks which we have been very negative on saw some buying interest on Friday. Although flight to safe haven assets has kept the dollar relatively strong against most other currencies, it has also kept the yen firm around 110 level against the greenback where we expect the unit to trade around until more clearer picture of BOJ tapering emerges. 

With Chinese stocks and its currency under intense selling pressure of late, we feel Japan should see some benefits of this by default as both its geo-political positioning, economy, currency and its corporate fundamentals are on much sounder footing. We thus see some long-only pan-Asian funds allocate assets in favour of Japan which might help partially offset the heavy selling pressure which we are continuing to see by big overseas investors in most global stock markets. 

With US tariffs on China looking to come into effect next week we think 'risk off' mode will remain dominant in global markets despite the occasional relief rallies we are likely to see. With US threatening to pull out of WTO altogether and China stance against US pressures hardening, we think it is most unlikely to yield to any unilateral trade decisions made by America, while partly enhancing its own stance on the world stage regarding open and multi-lateral trade agreements. Thus, despite rose-tinted scenarios drawn by many market watchers, we highly suspect that trade barriers will continue to rise from here. 

With NATO summit less than two weeks away, we think concerns about the post World War 2 alliance and its structural integrity in the current political climate will come into focus as it has done regarding global trade. With Europe and Turkey increasing charting their own courses regarding trade and politics, without the wholehearted US support, the treaty looks increasingly on shaky grounds. Moreover, we suspect any sympathy or even apathy shown by the US administration on Russia's stance in Ukraine in the coming meeting between Trump and Putin, will only further widen these cracks in NATO. 

With EU having to grapple with nationalists forces sweeping into power in places like Italy, Austria, Hungary and Poland, not to mention, having to make its final decisions on Brexit (and the fate of pro-EU Scotland and N. Ireland), Europe's outlook is equally uncertain. Although the recent EU immigration talks looked encouraging on the surface, the critical decision of where refugee centres are to be set up leaves the agreement very vulnerable and continues to give Turkey a strong hand in dealing with EU and most of its NATO allies. 

Going back to stocks, our scenario for weak tech and FA equipment names in Japan seems to be panning out nicely as we retain many of the related names in our recommended short sell list. Our recent company visits have mostly confirmed that there are strong signs of general oversupply in semiconductors and increasing push-outs in equipment deliveries. 

We are also seeing clear signs of very weak Crypto-related mining activity which by late last term had accounted for close to a whopping 10% of TSMC's revenues. We thus, keep a close eye on Nvidia (NVDA) to gauge how big this downturn will prove in terms of its overall impact on other chip segments, namely DRAM. We also believe FPD-related capex is likely to come under severe downward pressure as display panel pricing looks to be plunging fast while the bulk of China's big spending on capacity expansions come to pass. 

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