02 December 2018

As generally anticipated, and in line with Trump's play book, US has postponed plans to raise tariffs on Chinese imports by 90 days while China seems to have pledged to resume imports of US agricultural products and LNG, a strategy that it was pursuing anyway before 10% tariff hikes by the US led to retaliatory measures. 

Indeed, unless Chinese really do change their whole economic structure as some Washington China hawks like David Navarro and Wilbur Ross have been demanding, it is unclear what the tariff hikes have thus far achieved much. We think distortions in recent imports/exports patterns ahead of the initial US deadline for higher import duties and cooling off of the investment climate, especially in China, could continue as we now have three more months of uncertainties to chart through. 

Whether global markets will take this G20 agreement positively remains to be seen as stocks have already staged a decent bounce on anticipation of more productive trade negotiations, not to mention, less restrictive US monetary policy for next year.  It is also difficult to see any immediate change in the fundamentals driving slower growth prospects and weaker earnings for next term. 

So although we have had no China-sensitive automation-related, machinery or machine tool names in our short sell list ahead of the G20 meeting that just took place, we would be looking to add some should we see a more pronounced year-end rally in this space as some have been predicting. However, for now we continue to look for short picks in the less cyclical segments but what we consider to be highly overvalued names like Kikkoman (2801), Cyberagent (4751), Shiseido (4911), Nintendo (7974) and Softbank (9984). 

The most recent addition to our non-cyclical short sell picks is Familymart Uny (8280). This is a fascinating case of a massively overvalued retail chain, partly reflecting distortions from BOJ's oversized and in our view unnecessary QE program. Familymart is among a number of less liquid Nikkei 225 stocks that the central bank's ETF purchases had inflated to what we consider to be unsustainable valuations.

This in turn led to many analysts downgrading it to a sell which had led to build-up of  large short positions. By November, speculators began buying the shares, partly encouraged by the BOJ which has continued with its QE program but also on a clever plan to squeeze the shorts. Having rallied by nearly 200% from its Feb 2017 lows, initially on the potentials for Familymart/Uny merger cost benefits, its shares are trading close to 50x this term's average forecasts and 14x EV/EBITDA. Meanwhile, its short-term and longer term chart technicals are signalling a shorting opportunity.