Far too early to call Japan’s market bottom

With the US president now looking to back-track on going to a trade war with China, Trump’s old playbook in making a deal in the final hour, by getting as much concessions as he can, is now looking the more likely scenario, especially as we pass the mid-term elections. Although his hawkish advisors might not like the sound of this, it does seem the US president never really had any intention to play the long game his team had demanded. 

The news of a possible trade deal had come a few days after a strong rebound in world stock markets, on the idea that much of the short-term negatives included weaker earnings had now been factored in. In the US, prospects of big corporate share buybacks as well as historically  stronger US stocks in the month of November, especially during the years of mid-term elections, had led to a big turn-around in market sentiment.

Given the rising risks in being caught short of China-related plays in Japan, especially machinery and machine tool names, we have decided to err on the side of caution by removing Daifuku (6383) from our shorts list and wait to see how things pan out. Although we expect semiconductor-related orders to continue to weaken, clearly the market seems to be no longer reacting to the negative earnings news flow while over-reacting to the positive numbers elsewhere. This seems to support the idea that bad earnings news, at least in the shorter term has been discounted. 

One major development specific to Japan came from NTT Docomo (9437), nation largest wireless carrier. As we have been highly anticipating, the firm was the first of Japan top three carriers to fold under government pressure, planning to drastically cut its fees by as much as 40%. Although Docomo and KDDI (9433) took the biggest hits, one of our top shorts, Softbank (9984) also fell. We think Softbank Mobile IPO and its pricing could be in jeopardy just at a time when its Saudi-funded Vision Fund’s future has started to look uncertain given the geopolitics surrounding the Kingdom.

It is amusing to see the government putting pressure on daily utility costs like liberalising electric power market in 2016 and now forcing telecommunication firms to cut their fees at a time when the BOJ is desperate to push Japan’s inflation gauge higher. BOJ’s own muddled policy of allowing longer dated rates to go up but not officially curtailing its QE program to help its financial institutions and its savers to eke out better returns has not helped visibility either. 

All in all, we feel it is too early to call the bottom of the Japanese stock market, although many stale bulls obviously have. We rather wait to see how political events unfold to try to gauge when confidence will return to see corporate outlays stabilise. This is especially so in the case of China which has had a huge impact on earnings outlook of corporate Japan.