10 March 2019

As always, the US stock market led the direction for Japanese stocks. However, this time, and for the first time this year, US stocks showed a notable correction with tech stocks and other cyclicals leading the way down. With economic indicators showing continued weakness in almost all regions but particularly in Europe, selling pressure persisted with bearish comments dominating the headlines.

Topix which had just managed to crawl above its 1600 resistance line came tumbling down close to its 50-day moving average of 1560. With market participants tired of hearing about a pending trade deal between US and China, there was little else to support share prices as talks of rising inventories and weaker sales trend across many key developing economies hurt sentiment. 

Last week, ECB followed the US Federal Reserve with its major U-turn on normalisation of its monetary policy with plans to introduce a new round of targeted longer-term refinancing operations, mainly to provide additional funding for banks, postponing any interest rate hikes, etc. With ECB's euro-zone growth projections revised from 1.7% to just above 1% and having lowered its inflationary expectations, it seems clear that all central banks now including BOJ have reversed course to help put a floor on weaker economic activity. 

The US Federal Reserve Bank also underlined its dovish policy shift this year with Chairman Powell declaring that the central bank sees nothing in the economic outlook which would warrant further tightening as inflation rate remains tame despite the tight labour market. All these factors seem to have removed any possibility of further tightening for at least the next two quarters, if not for the rest of the year. With the Fed's balance sheet shrinkage program also expected to come to a stop sometime soon, we think Fed's policy will remain fairly supportive for share prices. 

Despite the more sombre mood setting in, we retain our optimistic stance on stocks which we adopted from the start of this year. We continue to believe that a final resolution in trade talks between China and the US will lift some major uncertainties regarding capital investments in China and should allow for resumption of expenditure needed to build more data centres and further automate factory lines. These will prove crucial issues for Japanese related businesses which had seen an abrupt halting of such activity from last quarter and have typically seen their share price halve from last year's highs. 

Semiconductor names were heavily sold off last week on concerns about high inventory levels, especially in the memory space which some analyst now expect the current oversupply to persist going into the 2nd half of this year. Micron's (MU) share price looks to have become a key barometer of market's outlook on this commodity segment of the chip market, with its shares having fallen close to 12% from its late February highs. Its earnings results and its latest guidance due out on 20th of March will be watched very carefully. Many industry observers have drawn parallels between now and 2001 when the tech bubble crash greatly hurt the sector.

However, it is vital to bear in mind that the dynamics of the memory chip market, especially DRAMs which is currently under intense pricing pressure, look dramatically different than in 2001 as near-line servers used in cloud storage and data centres now make up for over 30% of total bit demand. With data traffic growth remaining exponential, with 90% of the total stored data said to have been generated in the last two years alone, we not only expect the memory market to stabilise at a much quicker pace than in the past down cycles, but we expect bit demand to come roaring back.

Even without 5G or IoT, which are unlikely to boost demand in the short term, with more than 3.7bn humans now online, there are over 2.5 quintillion bytes of data being generated on a daily basis with 5bn searches a day on the web, half of which are coming from mobile phones which also generating their own masses of data through apps. From social media side, some reports suggest that on an every minute of the day basis there are over 4mn YouTube videos being watched with users posting more than 46,000 photos on Instagram and over 450,000 tweets being generated.

These staggering figures do not even account for the data being generated by things like e-commerce, ride hailing services, B2B data and those generated by governments. Thus, to look at the semiconductor market on a more historical perspective when a new Microsoft Window OS and the latest Intel processors very much dictated the PC cycles which accounted for the bulk of memory growth and extrapolate on past downtrends misses the point completely in our view. We thus, retain our bullish stance on some key Japanese semiconductor names as well as factory automation plays given the need for more efficient manufacturing as well as lack of skilled labour in China.