08 April 2018
We retain our highly cautious stance towards Japan stock market for now, continuing to expect momentum names in techs, robotics, batteries and other previously popular market segments to remain under selling pressure as overseas investors continue to unload their big holdings for now. Although many market participants seem reluctant to believe we are entering an era of trade war and rising trade barriers, as we have argued from the start of this publication, looking at US policy makers in charge, we can’t see any other outcome.
Besides concerns about trade, we believe continued worries about flooding of the market in US treasury issuance, widening US budget deficit and the likely increase in tensions in the Middle East will all play their part in keeping investors cautious as the strategy of buying on dips has clearly broken down in our view. After nearly 10 years of an unprecedented bull market, it will be interesting to see how much anxiety is building up in dealing with this strategic shift.
One subtle change from the past few weeks is that the most recent sell-off has not led to a stronger yen which by default is viewed as a risk-off safe haven. We suspect this is partially because fiscal year-end currency hedging by Japan’s multinationals has come to pass while the BOJ’s aggressive QE, partially using its funds to buy overseas securities, namely US treasuries, could have helped the yen stabilise for now. However, we suspect the yen could advance to wards the psychological 100 level against the greenback in the weeks to come and could possibly break below that line.
At a time when US monetary policy is clearly diverging, it will be interesting to see if the US administration will turn its attention on to BOJ’s oversized QE program to potentially label Japan a currency manipulator and if so whether BOJ’s independence will come under pressure by Japan’s ruling party who will try to avoid going on a similar trade war path as China has.
Needless to add, any yielding at all by Japan’s central bank in tempering its monthly securities purchasing operation could push the yen to even stronger levels and could lead JGB yields to spike. All this makes us believe that the financial segment in Japan which is not strongly owned by overseas investors should generally outperform this weaker market scenario.
We thus, retain our short sell calls on some of the more popular tech names in Japan, those geared to semiconductors, particularly memory and the SPE segment which we believe have discounted much good news ahead. Although we don’t want to give too much of our individual ideas away in this publication, we like to highlight that we continue to view Softbank (9984) as Japan’s poster child in its wreckless and debt fueled acquisition binge in global techs which we think will come back to haunt its chief, Masayoshi Son. To view our latest Long/short picks as well as our newly established list of pair trade ideas, please contact us.